How do I choose the right loan for my home?

There isn't a single or simple answer to this question. The right type of mortgage for you depends on many different factors:

  • Your current financial picture?
  • How you expect your finances to change over time?
  • How long you intend to keep your house?
  • How do you earn your money? Are you self-employed or do you receive a W2?
  • How comfortable you are with your mortgage payment changing

For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes after the fixed period expires.

The best way to find the "right" answer, is to discuss your finances, your plans and financial prospects, and your preferences frankly with an Atlantic Residential Mortgage professional. Back to top.

What is a fixed rate mortgage?

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount. Back to top.

What is an Adjustable Rate Mortgage (ARM)?

These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.

However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation. Back to top.

What is an Index?

The Index is the financial instrument to which an ARM loan is "tied" or adjusted. The most common indices are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets. Back to top.

Explain "Margin"

The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. Back to top.

What are conventional and jumbo loans?

Conventional loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.

In general, Fannie Mae and Freddie Mac's set a limit for single family, first mortgage loans. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes.

Conventional Loan Limits: call your professional for details.

Jumbo Loans are loans which are larger than the limits set by Fannie Mae and Freddie Mac. Because jumbo loans are not funded by these government sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payments if your purchase or refinance balance is above the limit is to use a combination of both first and second trust money. Every situation is different, but it is one more option to consider.

In addition to common loan structures such as fixed rate, adjustable rate and balloon loans, Fannie Mae and Freddie Mac also have loan programs for low to no down payments, community lending and affordable housing initiatives, construction to permanent, home improvement and reverse mortgages. Back to top.

Explain Home Equity Line of Credit

If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates and they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax advisor for details.)

At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. If you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely.

Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts.

You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition. Back to top.

Glossary of Terms

Complicated mortgage terms can make home shopping even more confusing. Below is a list of commonly used terms to help empower you as you speak with mortgage professionals and realtors. Back to top.

Adjustable Rate Mortgage (ARM). An ARM, also known as a Variable Rate Mortgage, is a loan whose interest rate is periodically adjusted based on a pre-determined index.

Annual Percentage Rate (APR). The APR is the cost of a mortgage stated as a yearly rate. Since the APR includes points and other credit costs, it is typically higher than the advertised note rate. An APR allows home buyers to compare different mortgages based on loans' annual costs.

Appraisal. An appraisal is a written analysis, prepared by a qualified appraiser, of a property's estimated value.

Buy-down. A buy-down is when a lender or builder subsidizes a loan by lowering the interest rate during the initial years of a loan. Payments increase when the subsidy expires.

ClosingCosts. The fees charged for services performed, including the home appraisal, loan origination, flood certificate, the title survey, etc.

Debt-to-Income Ratio. This is the ratio that results when a buyer's monthly payment obligation on long-term debts is divided by his or her gross monthly income.

Down Payment. The part of a property's purchase price paid by the borrower (i.e., not financed by the mortgage). Down payments can be anywhere from 3-20 percent of the purchase price.

Earnest Money. Earnest money is paid by the buyer to the seller to bind a transaction or assure payment.

Equity. Equity is the value of a property over and above the obligation against the property.

Escrow. Escrow is the holding of funds or documents by a third party prior to closing; the funds are usually for payment of taxes and insurance on property.

Fixed-Rate Mortgage. A fixed-rate mortgage has interest rates that remain constant during the repayment period.

HUD-1 Settlement Statement. Standard, government regulated settlement statement that itemizes the costs of transaction when purchasing a home. Commonly referred to as “HUDs” or “HUD-1s.”

Origination Fee. Fee(s) charged by the lender to the borrower to prepare loan documents, conduct credit checks, inspect and sometimes appraise property. Origination fees are usually charged as a percentage of the loan.

Lock-in. A lock-in is a written agreement guaranteeing a borrower a specific interest rate as long as the loan closes and funds before a certain date. A lock-in usually specifies the number of points paid at closing.

PITI. A borrower's monthly mortgage payment: Principle, Interest, Taxes, and Insurance.

Points. Fee assessed by the lender, usually to permanently buy a below-market rate. One point equals 1 percent of the loan amount. For example, three points on a $100,000 mortgage is $3,000.

Pre-Paids. Expenses such as interest and escrow reserves.

Private Mortgage Insurance (PMI). PMI, which protects lenders against loss if a borrower defaults, is typically required for borrowers making a down payment less than 20 percent. PMI typically requires an initial premium payment of 1-5 percent and also has a monthly fee.

Real Estate Settlement Procedures Act (RESPA). RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

Settlement/Closing. Closing is the meeting between buyer, seller, and closing officer (a lawyer or title/escrow company representative depending on the state) where the property and funds legally change hands by signing all relevant documents.

Settlement. Combination of hard closing costs and pre-paids. Costs include the origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, and all other costs.

Underwriting. Underwriting is the process during which the decision is made whether to approve a loans rates and terms based on the borrowers credit, employment, assets, and other factors.

Yield Spread Premium (YSP). A rebate by a lender or investor to a local Loan Officer for closing a loan on a certain product.

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