Types of Loan Programs
There are thousands of different loan programs available. Below are some of the most popular products:
Fixed Rate Loans
These are loans that maintain the same rate throughout the period of the mortgage. The terms that are currently available are 10, 15, 20, 25, and 30 years. The monthly payment will remain the same for the length of the loan. The last payment that is made will fully amortize (pay-off) the loan. An interest-only period is available for some programs.
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Adjustable Rate Loans (ARM's)
These are loans that have a rate which can adjust throughout the course of the loan's repayment, depending upon the movement of a specified Index. One example of a commonly use index is the one-year Treasury Bill. Others include the LIBOR, MTA, and COFI indexes. ARM programs may initially offer a lower interest rate than a fixed-rate mortgage. This makes them attractive to people who, by taking the lower initial interest rate, qualify for a larger mortgage. People who may benefit by choosing an ARM program are people planning on moving or refinancing within the first 5 years, people with a high probability of increasing their income, and people who need a low initial interest rate in order to qualify for their mortgage.
Before applying for an ARM, be sure to ask about the interest rate caps. Arms typically have 2 'caps', or limits, on how high or low the interest rate can adjust which also effects how high or low the mortgage payment adjusts. One cap sets the most that your interest rate can go up or down during each adjustment period. The other cap sets the most your interest rate can go up or down during the entire life of the loan. Caps of 2% per adjustment and 6% over the life of the loan are extremely common. For example, if your loan starts at 5%, and the per-adjustment cap is 2%, your interest rate for that adjustment period cannot go higher than 7%. You also know that the interest rate cannot go higher than 11% over the life of the loan. You need to take into consideration what your comfort level would be if you were to have to make a mortgage payment at the highest adjustment sometime in the future.
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There are several types of ARM products available including a Standard ARM, negative amortization loans, Pay Option ARMs, and buy-downs.
Standard ARM: Are available with initial rates that are fixed for 1, 3, 5, 7, or 10 years. When the initial rate period is up, the loan will adjust based on a formula that varies from program to program. The rate caps are typically 2% per adjustment and 6% over the life of the loan.
Negative Amortization Loans: These loans do not payoff the principal or the full amount of interest that is due. Negative amortization is a loan payment schedule in which the outstanding principal balance goes up rather than down. This loan allows for the lowest possible payment that you can make. These loans should be carefully scrutinized, preferably with legal counsel, to make sure that you understand the pitfalls of a negative amortization loan.
Pay Option ARM: Provides 3 payment options to borrowers each month, providing greater flexibility. The rate of a Pay Option ARM is determined by an index (LIBOR, MTA, COFI), with the addition of a margin. The borrower can make a minimum payment (a negative amortization payment), an interest only payment, or a principal and interest payment.
Buy-downs: This program is based on a standard ARM program, but allows for reduced interest payments for the first couple of years. The reduced interest lowers the mortgage payment and may allow someone to qualify for a loan that they otherwise would not have qualified for at the higher rate. The borrower is responsible for paying the difference between the below-market rate of the loan and the initial rate. This can be done with either a lump-sum in escrow, or by paying the required points on the loan.
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Blended Loans
These are loans that blend a first and a second mortgage together. This may be done for several reasons, including: avoiding private mortgage insurance, avoiding a jumbo interest rate, or to allow for a future additional pay-down of a mortgage (bonus, inheritance, investment sale, etc.).
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No Income / No Asset Verification Loans
These loans allow a customer to receive a mortgage without verifying their income. Because the income is not verified on these loans, there is more emphasis placed on the credit report and the appraisal of the subject property. There are several different variations including:
Stated Income: The income is stated but not verified. The employment history is usually verified with a letter from an accountant or a copy of a business license.
No Income/No assets: Neither the income nor any assets are stated on the application. This is commonly referred to as a 'no-doc' loan. You must have a superior credit history in order to be considered for this loan.
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