72°F
Fixed Rate Loans
(Conventional and FHA, some restrictions may apply for FHA)
The most popular type of mortgage loan, Fixed Rate Loans typically come in 30, 25, 20, 15, and 10 year terms. The interest rate is guaranteed to remain the same until the loan is paid in full. Principal reduction payments and interest payments are paid on a monthly basis, and they are often combined with homeowner’s insurance (hazard insurance), property taxes, and, as applicable, mortgage insurance payments. Fixed Rate Loans are utilized for original purchases as well as refinances, and they offer no future risk.
Please note that if you currently have an FHA loan, you may qualify for an FHA refinance with no new qualification required. You also may qualify for a conventional refinance and receive a refund from your original up front mortgage insurance. Please call Jason for details (520.275.1882).
Adjustable Rate Mortgages (ARM)
(Conventional and FHA, some restrictions may apply for FHA)
Adjustable rate mortgage loans have a set period of time during which the interest rate is fixed before it will adjust depending upon current market conditions. The principal and interest payments on these loans are most often calculated based on a 30-year term, but they have shorter terms during which the interest rate is fixed. By way of example, a 1-Year ARM is fixed for 1 year before the interest rate adjusts; a 3-Year ARM is fixed for the first 3 years before the interest rate adjusts; a 5-Year ARM is fixed for the first 5 years before the interest rate adjusts; and so forth.
These loans adjust based on a particular index, such as the 1-Year Treasury Bill or 1-Year LIBOR (London InterBank Offered Rate). They have an agreed-upon margin that is added to the index at the appropriate time of adjustment, to form the new interest rate. These loans also typically have a maximum amount the interest rates can adjust at each time of adjustment, as well as a maximum amount the rate can adjust over the life of the loan. These are called Periodic Adjustment Caps and Lifetime Adjustment Caps, both of which protect you from high adjustments.
ARM loans are utilized in those instances when a buyer is anticipating
spending a certain amount of time owning a home. For instance, if you
plan on owning a home for only 3 years, a 3-Year Adjustable Rate Mortgage
would provide for a lower fixed interest rate for those 3 years than
a Fixed Rate Loan, and with no pre-payment penalty.
ARM loans also are used for interim financing, meaning that if the
fixed interest rates are higher than desired, the adjustable rate would
allow you to realize a lower interest rate until the fixed rates are
reduced. This scenario does present a higher risk level, as you are
anticipating that fixed rates will drop during the initial term of your
ARM loan. For instance, a 5-Year ARM has a fixed interest rate for the
first 5 years. By having a 5-Year ARM, you are anticipating that fixed
rates are going to drop during that period. Jason can consult with you
about whether utilizing an ARM loan in this manner would be beneficial
in the context of current market trends.
Lastly, ARM loans are used to enable a buyer who has good future
earning potential to qualify for a little more home, knowing that
they will be able to pay a higher mortgage payment through an adjustment
or by refinancing the loan into a fixed rate. Please note that if
you currently have an FHA loan, you may qualify for an FHA refinance
with no new qualification required. You also may qualify for a conventional
refinance and receive a refund from your original up front mortgage
insurance premium. Please call Jason for details (520.275.1882).
Balloon Loans
Balloon Loans have a set period of time during which the interest
rate is fixed; however, at the end of that period of time, the remaining
principal balance is to be paid off in full. The principal and interest
payments on these loans are most often calculated based on a 30-year
term. Sometimes these loans have a conversion option, meaning that
at the end of the initial term an option exists to convert the balloon
payment into a fixed-rate mortgage at current market interest rates.
Balloon Loans are utilized for many the same reasons as the Adjustable
Rate Mortgages. If you are planning on owning a home for a set period
of time, such as 5 years, then a 5-Year Balloon Mortgage would allow
for a fixed rate during that time, with the anticipation of either
selling or refinancing at the end of five years. These loans also
present some risk, and whether they can be effectively utilized for
your particular situation should be discussed with Jason.
2/1 Buydowns
2/1 Buydowns are fixed rate loans whereby the lender buys down the interest rate 2% for the first year and 1% for the second year. Effective the third year of the loan, the interest rate stays fixed for the remainder of the term, with the loan set for a 1% adjustment after years 1 and 2.
2/1 Buydowns are not dependent on the interest rate market, as the
difference in interest payments is prepaid. For instance, if you choose
a 2/1 Buydown at 8%, this means that the actual loan is based on an
8%, 30-Year Fixed Mortgage; however, either the lender, the seller,
or the buyer is paying the dollar difference between an 8% rate and
a 6% rate for 12 months, and the difference between an 8% rate and a
7% rate for the next 12 months. This dollar amount is paid up front
at the time of closing, which presents less risk because the adjusted
rate is guaranteed regardless of interest rates at the time of adjustment.
Buydowns are only available on purchase transactions.
2/1 Buydowns are used to help buyers “grow” into more expensive
houses with the expectation that buyers will a) increase their mortgage
payment as their earnings increase; b) pay off the current debt within
the first two years, or c) refinance based on the anticipation that
fixed rates will drop.