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When you lock in a fixed interest rate for a mortgage, your principal amount and the interest you pay will never change. On average, you can get a Fixed Interest Rate Mortgage for 10 up to 30 years long, and can generally be paid in full before the end of the loan.

A Fixed Interest Rate Mortgage can be amortized or paid down over its life with a schedule of equal payments. This type of loan can also be paid on a bi-weekly schedule, reducing the loan's life in half. For people who can handle paying bi-weekly, the loan gets paid off faster because there are 26 payments during a calendar year instead of 12 monthly payments (hence additional 'time' pays down your loan sooner).

If you include an Escrow account (also known as an impound account), your monthly payment for your loan might include additional monies such as:

  • Taxes for property, school, county, and state
  • Insurance costs for home insurance

Including this type of account onto a Fixed Interest Rate Mortgage lets your mortgage company pay on your behalf important bills relating relating to a home mortgage loan. Some mortgage providers suggest this for those who put down less than 20% when purchasing a home, and the amount for this add-on is divided and paid an equal amount with each monthly or bi-weekly payment.

Will the amount you need to pay change? The principal amount for Fixed Interest Rate Mortgages stays the same, but if taxes or insurances are included and they increase or decrease, your payments could change.

An interest rate can change during the life of an Adjustable Rate Mortgage loan (ARM). Compared to Fixed rate loans, ARM loans start at low rates, then over time increase or decrease, depending on market rates.

For example, if you want to borrow money for a home, and you negotiate an interest rate on that mortgage, by taking Adjustable Rate Mortgage, you would be offered a lower rate compared to a Fixed rate loan. After a few months or years, the rate can be adjusted by the lender.

How much of an adjustment? That depends on:

a) Loan Index - what the current loan market announced rates are set at*
b) Loan Margin - how much a borrower (you) will pay above or on top of the Index Rate (usually between 1.75% to 3.5%)

* (Loan Indexes are connected to a 1 Year Treasury Security rate, the LIBOR rate (from the UK), the Prime rate, 6 Month CD rates, and COFI rates)

After the initial fixed rate of the ARM is over, the adjustment happens and becomes the fixed rate for a while . . . It can adjust often, once a year, or longer. But eventually a �cap� should occur. A cap is used to limit the increase in the rate of interest:

  • The Initial cap is the first increase, so when the ARM is ready to be adjusted, the initial cap rate is the maximum it increases during the first adjustment.
  • The Periodic cap can limit how much an adjustment to the rate happens each year.
  • The Lifetime cap is the maximum increase the loan rate can adjust to until the loan is paid in full.

Can an ARM convert into a Fixed rate loan? Sometimes the market environment provides very low interest rates. When that happens, any borrower who has an ARM loan may consider refinancing to take advantage of low rates and opt for a Fixed rate loan.

When you cross an Adjustable Rate Mortgage with a Fixed Rate Mortgage, you get a Hybrid ARM mortgage. In a 5-1 Hybrid ARM (for example), the first 5 years of the mortgage behaves like a Fixed Mortgage, and then it becomes an Adjustable Rate Mortgage. With Adjustable Rate Mortgages, a borrower would take a calculated risk that the interest rate could possibly go up, but in a Hybrid ARM there is less initial risk.

Why? If interest rates rise, the borrower of an ARM at the time of the rate adjustment would have to pay more interest. If Fixed Rate interest rates rise, the lender (your bank) would take on that risk, while the borrower is protected. This would be worthwhile if you were planning to sell your home after a few years (5 years in the above example).

In the 5-1 example, for the first 5 years, you would be protected in that you know the first 5 years the payment will be the same, and after 5 years, the payment will adjust ; the same with the lender, who understands that the first 5 years the interest rate remains fixed and then will be ready to accept what the new rate may be, in 5 or 6 or 10 or more years. At that time, the rate can float and you (the borrower) will take on that risk.

Hybrid ARMs can come in 3 Year, 5 Year, 7, 10, or possibly more. Hybrid ARM loans generally benefit the borrower if there is a chance the home will be sold before the interest rate adjusts, helping to capitalize on the lower initially fixed rate.

An FHA mortgage is a loan from a bank backed by the Federal Housing Authority. People that can't obtain a regular mortgage pose a certain risk for a bank, so they can try to get an FHA loan, which provides added security for the lending bank. If for some reason they cannot pay back the lending bank their loan, that loan is insured and will protect the lending bank.

An FHA loan is an ideal choice for you if you need less stringent requirements for a home loan. FHA loans do not require large down payments, are lenient if you have less than average credit scores, and often come with favorable interest rates.

A VA loan is home loan guaranteed by the US Veterans Administration, available for active US military, veterans, and their direct family members. No down payment is usually required, making the VA loan helpful to borrowers. The VA can establish the maximum loan amount that can be borrowed, as well as the acceptable requirements.

Great features include:

  • built-in loan fees so there are no surprises
  • no income restrictions
  • refinance opportunities at low interest rates (should they be available)
  • low monthly payments
  • no mortgage insurance requirements
  • roll-in costs may be permitted
  • no high credit scores required

Can you use the VA home loan for a vacation home? A 2nd home? An investment property? No, the VA home is for your primary residence only.

If you serve our country, the benefits of a VA Home Loan are many, which is a way of saying Thank You for your service!

An Interest Only Mortgage is a loan where you only pay the interest each month for the life of your loan. So how do you pay down the principal of the loan? Unlike a traditional mortgage loan (where you pay down the balance over time), Interest Only Mortgages can be a little risky. However, the risk is worth taking because interest rates adjust (up or down) over time, and have the potential for great savings (that you can accumulate) if you do not have a huge monthly bill.

Take for example a 5 year Interest Only Mortgage. For the first 5 years, the interest rate and the payment are much lower than traditional mortgages. What can you expect after 5 years, where the rate can go up or down?

  • You would need to start paying back the principal
  • You could benefit by the rate going down *
  • You could risk the rate going up**

PRO: * If you want to invest in a home, fix it up, and sell it within a year or more, it would be great to keep monthly payments as low as possible through this type of loan

CON: ** If you, for example, were paying $2000 a month for an Interest Only Mortgage, and the rate increases, you might have to pay $3000 a month, which could be difficult increase to handle

How do you know if an Interest Only Mortgage is right for you? If you are good at saving money for the repayment, and want a low monthly amount, then the Interest Only Mortgage is good to consider. If you are not good at saving money, then this loan is very good if you plan to sell early before the loan period may update (because the interest rate may change).

Index

Mortgage lenders associate ARM loans to an Index, which is where market environments affect and thereby set changes in interest rates. These rates are relied upon by both lenders and borrowers. What determines an interest rate for any given day, month or year? Indexes and the interest rates that result from Index changes usually go up and down (they fluctuate), based on the general conditions of the nation's economy.

Margin

The Margin is the bank's profit on the loan they lend ; it is a percentage "point' that is marked up above the Index rate. Say the Index for borrowing on a home is set to 4% . . . the bank may have a margin on top of that percent (such as 2%). The true Index on your loan would therefore be a combined rate or 6%. If the Index drops to 3%, your rate would likewise change down to 5%.

Initial Interest Rate

The Initial Interest Rate or promotional rate is a low introductory rate that catches the attention of people looking to afford a mortgage loan. Why is it initially a low rate? At first, the interest rate is made available below market rates, then eventually they increase (i.e. they adjust to the current or above market rates.)

Note Rate

The interest rate a borrower locked-in for a home mortgage loan is called the Note Rate.

Adjustment Period

The Adjustment Period for a home mortgage loan is the time the loan's interest rate stays a constant percentage, until it changes. If an Adjustable Rate Loan has an initial rate fix at 4%, and then then changes to 3.9% after a year, then that Adjustment Period is 1 year.

Interest Caps on an ARM loan

The maximum interest rate an ARM loan can increase to may be 'set' or 'capped' (when an adjustment period arrives). For example, a 5 to 1 ARM loan starts where the borrower's interest rate is set at a percentage. After that 5 year duration, the loan could adjust to whatever the rate the market will be at. A Cap would prevent the rate from going too high.

Negative Amortization

In a Mortgage loan, an Amortization schedule involves the amount of time it takes to retire (or pay off). If property values decrease, the interest rate can still continue to rise. This increase is called Negative Amortization. In this situation, you could either refinance the mortgage loan (if you can), or pay toward the principal in order to reduce and eventually pay off the loan.

Convertible ARM

A Convertible ARM loan is when your Adjustable Rate Mortgage changes to a Fixed Rate. This can help when you find a low rate through an ARM and then after biding your time, acquire a Fixed Rate to avoid higher rate increases.

Carryover

If a Cap prevents an interest rate increase when the time for a rate adjustment will take place, some ARM loans allow the lender to defer that increase to another year, even if the market (Index) rates stay the same or changes. That deferment is called a Carryover.

6-Month CD Rate

The 6 Month CD interest rate takes into account what secondary markets average for nationally traded 6 Month CDs. For ARM loans, that rate can increase or decrease every 6 months. The frequent Index changes those rates, weekly, and can be unpredictable.

1-Year T-Bill

For most ARM loans, the market environment (Index) determines what will set an interest rate. Those rates usually increase or decrease after a year, specifically for a 1-Year T-Bill. What is the rate of a 1-Year T-Bill? That loan rate will depend upon the Index of any given week (because it often changes weekly). For other ARM loans such as Hybrid ARMS, low and favorable interest rates are fixed at first, then eventually adjust. Hybrid ARMs are attractive with low rates at first, available at 1,3,5,7, or sometimes 10 year periods, that lock in a low fixed rate, and then adjust according to the Index (market forces) at the time of adjustment. The rate for a 3-1 ARM loan, 5-1, 7-1 or 10-1 varies by week.

3-Year T-Note

For a 3-Year ARM loan, the interest rate will depend upon what the 3-Year T-Bill's rate is in the market Index. A 3-Year T-Bill will adjust (increase or decrease) after 3 years. That adjustment is based on the weekly Index rates, which can change each week and be unpredictable.

5-Year T-Note

For a 5 year ARM loan, the interest rate will depend upon what the 5-Year T-Bill's rate is in the market Index. A 5-Year T-Bill will adjust (increase or decrease) after 5 years. That adjustment is based on the weekly Index rates, which can change each week and be unpredictable.

Prime

The Prime Lending Rate is the interest rate that banks charge each other for loans. For the interest in ARM loans, that rate is set in relation to the Prime Rate. When you want to borrow money for an ARM loan, you need to make sure at what percent you are borrowing, and if that percent is in addition to the Prime Rate of the lending bank, or the Federal Reserve. The Prime Lending Rate is effected by the Federal Reserve lending rate to banks, and is historically 3% above the Federal rate.

12-Month T-Bill

The Index for a 12-Month Moving Average 1-Year T-Bill applies to ARM loans. This average monthly interest rate from Treasury Securities continuously adjusts on a per-year basis until it matures. A 12 Month Average for 1-Year T-Bills for ARM loans is followed in place of the Treasury Securities (T-Sec) Index which is more of a 52 week Bill-based Index.

Cost of Funds Loan Index (COFI)

The COFI Index is an Adjustable Rate Mortgage Index is used by banks to determine the interest rate for a loan. The rates are derived by taking an average from a monthly published set of rates set by banks (of the 11th district). For ARM loans, the rate can increase or decrease on a monthly basis. Some lenders will take an average of the 12 month COFI rate Index to set the final rate ; yet more borrowers seek fixed rates compared to ARM loans, relying on COFI Index rates.

LIBOR Interest Rate Benchmark

LIBOR or London Interbank Offered Rate is the rate at which banks are prepared to lend to each other and the benchmark (standard) that follows the agreed upon rates. LIBOR involves seeing what projected rates may or could be, then after publishing those rates (via the British Bankers Association), the benchmark has been set. At that point, any one wishing to obtain a loan from a bank may actually be using the rate published from LIBOR for that day. Some US banks rely upon the LIBOR rates when providing loans.

National Average Contract Mortgage Rate

The National Average Contract Mortgage Rate is an average contract interest rate, published by some bank lenders, for home mortgage loans. This rate is beneficial when looking at historical values for indexes referenced by ARM loans.

A Balloon Mortgage is when a large part of the principal is paid off in 1 bulk payment at the end of the loan. You basically make payments throughout the life of the loan, and then a final payment when the loan is due.

If you do not want to or cannot pay off the loan when it is due, you can try to refinance the loan, or sell the property.

Balloon Mortgages are usually 1 to 7 years long. Similar to a fixed rate mortgage, Balloon Mortgages also require a consistent payment each month. Compared to an ARM, Balloon Mortgages are shorter and come with low interest rates.

A loan for a Balloon Mortgage is very attractive for someone who either has saved enough to pay off the loan when due, or is considering to sell their home before that final payment is due.

A Reverse Mortgage begins with the the lender determining the value of a home, the age of the home, and current interest rates. Once the lender determines how much of a loan the borrower is qualified for, the details are worked out, such as:

a) rolling the closing costs into the loan
b) how the borrower will receive the loan

  • using tenure, a tax free payment that comes once a month (with a monthly mortgage / loan statement)
  • using a line of credit, (with a monthly mortgage / loan statement that includes withdrawals you made)
  • one lump sum (the full amount of the loan up front)
  • combination of the above line of credit, monthly [tenure payment] or large cash loan

If you have a existing mortgage, you can often use the funds from a Reverse Mortgage to pay your existing mortgage off.

At all times, the home belongs to the borrower, and not the lending bank. What if the borrower dies? The surviving family can sell the house to pay back what is due to the lending bank.

This is a mortgage loan where the payments to the lending bank gradually increase over time. For example, the first year of this type of loan the monthly mortgage payment might be $1000. The second year it might increase to $1100 a month. The third year it might be $1250. Eventually it will level out until the end of the term (such as a 20 or 30 year loan, for example).

The interest rate at the start of this loan is low, attracting buyers who might not be able to afford a loan, but are qualified for one.

However, if the payments to the bank are lower than the accumulating Interest, a Negative Amortization could occur, which could increase the balance of the loan.

You have several options; the best way to get started is to outline your capabilities and your goals.

a) How much do you think you can afford every month?
b) How much, if any, do you want to put down?
c) Are you going for the long haul (to own your home) after 15 or 30 years, or do you plan on selling early on?
d) Do you want to have a fixed rate so that your payments are the same each month, or can you handle a variable rate that changes your payments over time?
e) Most importantly, are you open to advice? We happen to be experienced, and we know what to expect, so Contact Us for our guidance. We know the bottom line for you is both affordability and savings, and we know that once you are happy with us, referrals based on your positive experience is our motivation to save you on your mortgage loan!

Options for borrowing on a mortgage loan include the amount of years you plan on living in your home:

  • 1 to 3 years could mean you should consider a 3-1 ARM or possibly a 1 Year ARM.
  • 3 to 5 years or a 5-1 ARM loan
  • 5 to 7 years or a 7 - 5 ARM loan
  • 7 to 10 years or a 10-1 ARM loan or possibly a 30 year fixed rate loan
  • 10 years or more, at possibly a 15 or even 30 year fixed rate loan

You can research online for hours yet still benefit from our hand-holding and expert mortgage loan advice.