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.
Your payment will be fixed for a full year based on a rate as low a 3.95%. However, your actual interest rate will adjust monthly and is approximately 6%. If you choose the minimum payment option, you’ll defer the interest (negative amortization). Minimum payment is fixed for 1 full year. Increases in the payment in any give year can’t exceed 7.5% of the previous years payment (for example, a $1,000.00 payment couldn’t increase more than $75.00 in any given year). You don’t have to choose the minimum payment.
Each month, your payment coupon will detail 4 payment options, and they are: A) minimum payment, B) interest only payment, C) 30 year payoff, and finally D) a payment that will pay off your loan in 15 years. This is an excellent loan. It allows superior cash flow, particularly for those purchasing a home in the California market.
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.