J. STEVENS MORTGAGE

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FINANCIAL SERVICES

TYPES OF MORTGAGE LOANS

Fixed-Rate Mortgages

The most popular type of mortgage is a 30 year or 15 year fixed-rate mortgage. With this option, the interest rate is locked in and will remain the same throughout the duration of the term. Fixed-rate mortgages allow borrowers to make the same payment every month without having to worry about any fluctuations in their given interest rate. The total monthly payment can change due to an increase of escrowed taxes or insurance during the life of the loan. Because the lender collects the interest to some degree before the principle half way through the term of years only 25% of the premium has been paid off. This is an important fact to consider when thinking about refinancing to a lower interest rate. trade

The trade-off for such predictability is that these mortgages can often come with higher closing costs. In addition, they can be a little more challenging to get approved for versus some other types of mortgages. However, despite these disadvantages, obtaining a fixed-rate mortgage can make sense for many buyers, particularly first-timers.

AdjustableRate Mortgages

Contrary to the fixed-rate mortgage, an adjustable-rate mortgage (ARM) comes with an interest rate that fluctuates as the market dictates. This type of loan traditionally starts off with a low rate and adjusts over time. With ARMs, the rate will change during the term of the mortgage. Some Fixed rate mortgages are not fixed for the entire amortization period of the mortgage. For instance, if you agree to a 30-year mortgage with only a 5-year Fixed term, then your rate is locked in only for that 5-year period even though the payments were amortized as if you had a 30 year term. Once the 5 year term expires the loan may have an increasing interest rate that adjusts every month, or every six months, or every year, or every 2 years, or become a variable rate such as an Adjustable Rate Mortgage. When the Fixed rate term expires, you may want to renegotiate a new rate at a new term, or opt for a completely different type of mortgage altogether. If the interest rates get lower your payments while not being Fixed might be lower for as long as the interest rate don't rise. If you find yourself in this situation the bank you are with may be able to refinance you into a lower 30 year fixed mortgage, sometimes at a rate lower than any other bank can offer so it is worth checking with them first to see what your options are. A shorter fixed period is often a cheaper or a lower monthly payment and can be used to qualify for a home that you might otherwise not be able to afford

Generally speaking, such mortgages are initially set up like a standard loan based on the present interest rate. At regular intervals, the mortgage is reviewed, and should the market interest rate change, the lender will adjust the mortgage repayment plan accordingly. This can be done either by changing the length of the amortization period, the size of the payment, or a combination of both.

A popular variety of an adjustable-rate mortgage these days is the “hybrid ARM,” in which a certain interest rate is guaranteed to stay fixed for a certain time. This initial interest rate is often lower than what you would traditionally be offered with a traditional 30-year fixed loan.

Conventional Mortgages

A conventional - or conforming - mortgage is one that is not insured by the federal government, which means no guarantees are made to the lender should the borrower default on the mortgage payments. As such, they are considered higher risk for lenders. For this reason, borrowers typically need to have a high credit score, a healthy financial history, and a low debt-to-income ratio in order to get approved for a conventional loan.

If less than 20% is put towards a down payment on a personal residence, then Freddie Mac and Fannie Mae guidelines stipulate that the lender needs to bring on a private insurer for the loan. Such Private Mortgage insurance (PMI) must be paid for by the borrower. However, once the borrower has either paid down at least 20% of the property’s purchase price if the home is a primary residence, payments for PMI will cease if the lender is contacted and made aware of this. If the value of the home increases after either a one year period or a two year period depending on the original contract the PMI could be dropped if the borrower now clearly has established a 20% or more equity in the subject property. How banks handle this increase in value is not always the same. Most loans change lenders during the course of the loan. Some banks may require a new appraisal to prove the owner has a 20% or more equity ownership and some banks may be okay with a simple phone call or comparable addresses submited for a value review. There are alternatives to Private Mortgage Insurance like Lender Paid Mortgage Insurance or LPMI. An increase in interest rate pays for the LPMI pemium. Now there is no seperate payment that can be dropped when the 20% equity ownership is reached because the mortgage interst rate has become increased to cover the LPMI. Only a refinance can remove the LPMI in most cases. The LPMI as a part of the mortgage payment might increase the tax deductable interest on your home mortgage and consulting a tax advisor would be in your best interest.

These types of mortgages follow the guidelines set by Fannie Mae and Freddie Mac, and may either be fixed- or adjustable-rate mortgages.

Interest-Only Mortgages

Some borrowers choose an interest-only mortgage in an effort to keep their payments as low as possible. A mortgage is considered “interest only” if the monthly mortgage payments consist only of interest. This option often lasts for a specified period, typically 5 or 10 or 30 or 40 years. Borrowers can pay more than interest if they choose to. No principle portion is paid, which means the only way equity can be built up during this interest-only time period is through appreciation.

By only being temporarily responsible for paying the interest portion, monthly payments are substantially less. It’s important to note, however, that reducing monthly mortgage payments will increase the overall interest that will need to be paid over the life of the mortgage, and lowers the amount of home equity that will be gained. That’s why such an option should only be temporary in nature.

Home Equity Loans Or HELOC's, Meaning Home Equity Lines of Credit

Also referred to as second mortgages, home equity loans allow homeowners to borrow money against the equity already built up in the home. They are an attractive option for those who need to cover a large expense, such as a major home renovation where a large sum of money is required up front. With these types of loans, homeowners can borrow up to 80 even 90 percent of the equity and still be able to possibly deduct some of the interest that was used for home repair or home improvement, upon filing their tax returns. In years past when the interest on a home equity line of credit was completely tax deductable it made a lot more financial sense to use home equity to cover expenses. In todays world a Home Equity Line of Credit might cause some home owners to lose their home if they suddenly cannot make the payments on time.

There are two types of home equity loans: fixed-rate loans and lines of credit. Both of these variations typically range from 5 to 15 years, and must be repaid in full when the home is sold.

The fixed-rate variation offers a single lump sum of money to the homeowner, which then needs to be repaid over a certain time period at a specific fixed interest rate. Often a HELOC can come with an option to lock into a fixed rate or might start with a short fixed rate period on the initial lump sum amount borrowed.

With a home equity line of credit (HELOC) homeowners can borrow against the equity in their homes similar to the way a credit card works. They are allowed to borrow a set limit, and can withdraw as little or as much as needed at any time, as long as this limit is not exceeded. Only the amount withdrawn is charged interest, and once the money is repaid, it can be borrowed again and again until the end of the loan term is reached. Like a Credit card a HELOC can affect your credit rating if not paid on time, or if you borrow more than a third, or a half, or three quarters or more, of the total amount that you could borrow. If you always pay your HELOC payment on time, then the bank that you started your HELOC with may decide to extend your term or grant you a new term at or near the expiration at the end of the HELOC.