Thursday, August 8, 2013

Keep this Hand Guide to Mortgage Types - Truerate Partners Northbrook, Il

Keep this Hand Guide to Mortgage Types, and call me when you are READY! - Steve@truerate.us
Loan
type/terms
Fixed rate mortgage 30 yearsFixed rate mortgage 15 years
Fixed rate mortgage 20 years
Hybrid
ARM
Traditional
ARM
Balloon
Mortgage
Rate changesNever; fully fixed for entire termNever; fully fixed for entire termUsually after fixed period of 3, 5, 7 or 10 years, then annual change typicalFully variable, typically changing at one-year intervals; some have shorter change intervalsNever; fully fixed for entire term
BenefitsLow, stable payment; usually easiest qualificationStable payments; builds equity faster; lower total interest costs than 30-year termLower rates than fully fixed-rate mortgage; can sometimes borrow larger loan amount for same incomeCan have lowest interest rates, but qualification may not depend upon today's interest rateOften has lower interest rate/monthly payment over balloon period than fixed rate; similar to hybrid ARM
Drawbacks/RisksCan have highest total interest cost over time; user may "buy" more rate stability than actually needed, increasing costRequires higher income to qualify; less affordable monthly payment; funds commited to payment cannot be used elsewhereStable payment for a number of years, then unpredictable; rates can jump by as much as 6 percentage points at first adjustmentPayments fluctuate at each rate change; unpredictable, rates can change as much as 2 percentage points at each adjustmentLoan fully due and payable when balloon period ends; must be paid off or refinanced in unknown market conditions
Alternative strategyConsider Hybrid ARM with appropriate fixed periodConsider 30-year term and prepaying loan to preserve cash-flow flexibilityConsider Fixed rate mortgage or longest possible fixed period, if loan hold period not knownConsider Hybrid ARM to ameliorate rate and payment risks for a given periodConsider Hybrid ARM to ensure continued loan availability
These may be useful for…Purchasing a home; first-time homebuyers; refinancing to improve cash flow/lower paymentRefinancing to lower total interest cost; retiring mortgage more quickly; building or rebuilding equity more quicklyPurchasing or refinancing when time horizon is seven years or shorter, and where borrower can handle increase in monthly paymentsPurchasing or refinancing when interest rates are near top of cycle, and are likely to fall, or sale or refinance is anticipated within three yearsPurchasing or refinancing when time horizon is three years or longer and home will be sold prior to end of balloon period
Consider ifBuying or refinancing a home and planning on owning for longer than 10 yearsBuying second home; refinancing to build equity; paying off mortgage before life event (retirement, etc)Buying a home and expect to move before fixed period ends, or know income will rise to offset payment risk, even in worst-case scenarioBuying or refinancing when income can handle frequent payment changes and worst-case scenario for rates over a four-year periodBuying a home and expect to move before balloon period ends, or have resources to pay off mortgage if refinance not available
When shopping, ask about"Full cost" vs. "No cost" refinances, prepaying loan to shorten term if desiredIf 20-year term makes payment too high, whether 25-year term is availableInterest rate caps, for first and subsequent adjustments, worst-case scenarioA history of the Index the loan is keyed off, margin and capsWhether or not there is any built-in refinancing option when the balloon period ends

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