Mortgages 101:

Here's a rundown of the basic loan programs available right now:

Fixed Rate Mortgages:

  • Like the name implies, this loan is a set interest rate over a set term (generally 15, 30, or 40 years in some cases).
  • Fixed rate mortgages are especially suitable for home buyers who will be staying for a longer term in the home (over 5 years, in general).
  • Fixed rates provide the security of knowing what the interest rate will be for the entire life of the loan.
  • A fixed rate mortgage could save you lots of money if interest rates rise above your fixed rate.
  • In general, fixed rate loans are a little more expensive in terms of interest rate than some other loan products, at least in the early stages of the mortgage. The borrower is paying for the security of a fixed interest rate.

Adjustable Rate Mortgages:

  • An adjustable rate mortgage is also known as an ARM.
  • An ARM is tied to an index like the 10 year Treasury, or the COFI index, etc.
  • Whatever change occurs within the index rate, a corresponding change is seen within the ARM's interest rate.
  • Most ARMs have features called "caps". Caps are usually composed of short-term, and lifetime caps.
  • Short-term caps can be a month, 3 months, 6 months, yearly, etc. They limit how much an ARM can increase or decrease its interest rate during that period.
  • The lifetime cap limits how much an ARM's interest rate can increase or decrease during the entire life of the loan. If your ARM has a 3% lifetime cap, and your starting rate is 5.25% that means your interest rate cannot increase past 8.25% or decrease below 2.25% at any time.
  • Pay close attention to lifetime caps if you're concerned about volatile interest rates in the near future.
  • Many ARMs have an introductory period where the initial interest rate is fixed at a lower rate known as the "teaser rate" for a short period of time.
  • Most ARMs provide borrowers with a lower initial monthly payment than they would have on a traditional fixed rate loan.
  • Your loan officer should always tell you what the "fully indexed" interest rate of the ARM will be after the "teaser rate" expires.
  • ARMs are great choices for borrowers who don't expect to be in a home for a long period of time (2-5 years).

Balloon Mortgages:

  • A balloon payment allows monthly amortized payments to be made on a mortgage for a set period of time, after which all of the remaining loan balance is due.
  • Let's say you have a 40/30 fixed rate loan. Your loan is amortized as if you were going to make monthly payments on it for 40 years, but the balloon payment is actually due in 30 years.
  • This can be very advantageous to borrowers who would prefer a lower monthly payment (the same loan amortized out to 40 years is less per month than the same loan amortized out to 30 years).
  • A longer amortization schedule means you pay more in interest each month and less into principle than you would a 30 year or 15 year amortization schedule.

Interest Only Mortgages:

  • A very affordable product, this option generally allows for very inexpensive monthly payments compared to other loan products.
  • By paying only the interest each month, the principle balance of the loan is not reduced.
  • If house market values should fall the borrower would owe more on the loan than the property could be sold for.
  • "Interest only" is generally an option on loans. It either is in effect for a set period of time, or it's the choice of the borrower whether they pay the full payment amount each month (the principle and interest) or just the interest.

Apply online, or call (615) 292-5351 to find out which loan programs you can qualify for!