Fixed Rate Loans
Thirty- and fifteen-year fixed rate financing programs are the “elite home mortgage.” They offer the very best rates for the very best borrowers. The payments and interest rate are fixed for the life of the loan. Although these loans offer excellent terms, careful consideration should be given before selecting this loan. If rates exceed 7.5%, it may make sense to select an interim or variable rate product. A variable rate is an excellent place to “park” while waiting for fixed rates to improve (see option ARM).
Interim Fixed Loans
These are 30-year loans that are fixed for a specific period of time, typically 3-, 5-, or 7-year terms and than adjust for the remaining period. The adjustments usually can not exceed 2% annually and the life cap is approximately 5% over the initial rate. These loans regularly have a lower interest rate than the 30 year fixed and are ideal for those who don’t expect to have the same mortgage beyond the initial fixed period.
Adjustable Rate Mortgage
These are 30-year loans that are fixed for a specific period of time, typically 6 months to 1 year and then adjust for the remaining period. The adjustments usually can’t exceed 2% annually and the life cap is approximately 5% over the initial rate. These loans regularly have a lower interest rate than either the 30-year fixed or the interim fixed programs. These programs have merit for those who need a lower payment over the near term.
Points, No Points, or No Cost
Points are up front prepaid interest on your loan. Each point is equal to 1% of the loan amount (Example: 2 points on a $300,000 loan = $6,000). By accepting a slightly higher interest rate, you can eliminate the points. Please don’t confuse a no-point loan with a no-cost loan. Even if you eliminate the points, you’ll still have closing costs. These costs in most cases will be between $2,000 and $3,000 dollars. If you plan in keeping your loan for less than 5 years, it makes sense to eliminate points and costs.