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| Common Types of Mortgages Available |
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Unlike 20 or even 15 years ago today there are literally hundreds of different types of mortgage products available. They can all be broken down to fit within 5 basic categories.
The information contained below provides a very brief overview of the most common types available. This information is provided to give you a better understanding of the choices you have today but it is not meant to be comprehensive.
Each of the mortgage products outlined below requires a detailed explanation and analysis as it may apply to each one of our clients. Furthermore, additional information must be disclosed before we can recommend any particular mortgage product to our clients. We look forward to consulting with you to determine the right mortgage for YOUR specific needs. |
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| These types of loans are exactly what they sound like. Your monthly payments consist only of the interest portion of the money borrowed. In essence, you are only paying for the “cost” of the money. You do have the option of sending in “principal payments” but they are not required. Interest Only loans may be the best use of your cash flow in conjunction with a comprehensive mortgage plan. These types of loans are typically used for Cash Management Strategies to build long term wealth. For a more detailed discussion on these types of mortgages please go to the “Articles” link and download the Interest Only Mortgages article. |
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| An amortized loan is what a traditional 30-year fixed rate loan would consist of. The monthly payment for this type of loan is comprised of both principal and interest. Initially the majority of the monthly payment consists of interest while a small portion goes towards paying down the original balance of the loan. Fifteen years into a 30 year fixed rate mortgage you still have 71% of the original balance remaining. If you remain in this loan the principal component of your monthly payment really begins to increase in the second half of the term while the interest portion decreases. |
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These types of mortgages will have a fixed percentage rate and a fixed monthly payment for a certain number of years. They typically carry higher rates than other types of mortgages but they offer the security and certainty of knowing your monthly payment and interest rate will not change for the term of the loan. The most common are a 30 and 15 year but fixed rate mortgages. A 10-year and 20-year have been around for a while and recently a 40-year and even 50-year have become available. However, these longer term mortgages work slightly different in that after the initial 30 years there is a balloon payment. In essence, the longer term is used to calculate your monthly payment which will be lower than a 30-year fixed but if you remain in the loan for longer than that you will have a lump sum payment due. See balloon mortgages below for a more detailed explanation.
Advantages
- You are assured your interest rate and your monthly payments will not change
- They typically have a lower interest rate
- The initial rate on an ARM is fixed. The shorter the initial fixed period, the lower the initial rate can be.
- You can borrow more with an ARM than a Fixed Rate Mortgage. If you're just outside the range of your dream home, an ARM can make all the difference in getting qualified and being able to buy that home.
Disadvantages
- Your interest rate and monthly payment may go up if you stay in the product past the initial fixed rate term.
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| Adjustable Rate Mortgages (ARMS) |
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These types of mortgages have an interest rate that will adjust over time and monthly payments that are recalculated on a scheduled basis to reflect changes in the “market” interest rate. Interest rates for ARMS are typically lower than the rates in fixed-rate mortgages. ARMS allow you to fix the interest rate for the length of time that you plan to hold the loan without paying a higher cost for interest rate protection during a time when you will not need it. When you know for certain that you will only have a particular mortgage for a certain number of years these types of loans are the best choice. To better understand the working components of ARMS please go to the “Articles” link and download the Adjustable Rate Mortgage article.
Advantages
- You are assured your interest rate and your monthly payments will not change
Disadvantages
- They typically have a higher interest rate and therefore higher monthly payments. The lenders are assuming the risk that the market rate may go up and you'll be locked in at a lower rate.
- They are harder to obtain. Since your interest rate and payments are higher than other types of mortgages, you may not be able to borrow as much as you might be able to with another type of loan.
Common types of ARMS
10/1 ARM
The initial interest rate is locked for 10 years and then adjusts annually for the remaining 20 years.
7/1 ARM
The initial interest rate is locked for 7 years and then adjusts annually for the remaining 23 years.
5/1 ARM
The initial interest rate is locked for 5 years and then adjusts annually for the remaining 25 years.
3/1 ARM
The initial interest rate is locked for 3 years and then adjusts annually for the remaining 27 years.
2/28 ARM
The initial interest rate is locked for 2 years and then adjusts annually for the remaining 28 years. This type of mortgage is typically used for clients with less than perfect credit.
1 Year ARM
A 30-year loan with an interest rate and monthly payment that adjusts annually.
6 Month ARM
A 30-year loan with an interest rate and monthly payment that adjusts every six months.
Option ARM – also commonly referred to as a Cash Flow Mortgage or Pick-A-Payment. This type of mortgage can be the best financial tool available when used correctly to manage your cash flow and re-direct monthly expenditures towards retirement and college planning as well as long term wealth building. They were designed for higher income earners who desired the flexibility of making the minimum payments so they could free up cash for other investments. These types of loans seem complicated at first but a qualified mortgage planner should be able to break them down into pieces that are easily understandable. When we consult with our clients we accomplish this in a face-to-face presentation that takes roughly 30 minutes. This type of mortgage provides you with up to 4 payment options each month to choose from and each one has a higher monthly payment as you move down the list. They are:
- Minimum payment option – this is “discounted rate” that is typically less than even the interest only payment.
- Interest Only Payment Option (if available).
- Fully Amortized 30 year Payment Option.
- Fully Amortized 15 year Payment Option.
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Like adjustable rate mortgages, a Balloon Mortgage has a fixed-interest rate and payment for a certain number of years. The big difference here is when the initial period expires the entire balance of the loan becomes due. You must pay back the remaining loan balance after the initial term. This is usually accomplished either by refinancing your loan or selling the property. The payments are calculated on a 30 year amortized schedule but the loan is due in full after the certain number of years is over.
Example: A 5-Year Balloon:
This loan has a fixed interest rate and monthly payment for five years. After that, the entire balance of the loan becomes due in one "balloon" payment. If you have a 40-year fixed rate mortgage, your payments will still be calculated on a 30-year schedule so when you have 10 years remaining you will have a lump sum for the balance due.
Advantages
- It is easier to qualify. Since the loan is effectively a short term loan (usually no more than ten years) the lender is taking less risk which makes it easier for you to qualify.
- It gives you a certain number of years for protection from rate increases.
Disadvantages
- You must refinance your mortgage, sell your home, or pay the remaining balance of the loan at the end of the fixed period. Unlike ARMS, after the initial period there is no extension.
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