Keep this Hand Guide to Mortgage Types, and call me when you are READY! - Steve@truerate.us
Loan type/terms | Fixed rate mortgage 30 years | Fixed rate mortgage 15 years Fixed rate mortgage 20 years | Hybrid ARM | Traditional ARM | Balloon Mortgage |
---|---|---|---|---|---|
Rate changes | Never; fully fixed for entire term | Never; fully fixed for entire term | Usually after fixed period of 3, 5, 7 or 10 years, then annual change typical | Fully variable, typically changing at one-year intervals; some have shorter change intervals | Never; fully fixed for entire term |
Benefits | Low, stable payment; usually easiest qualification | Stable payments; builds equity faster; lower total interest costs than 30-year term | Lower rates than fully fixed-rate mortgage; can sometimes borrow larger loan amount for same income | Can have lowest interest rates, but qualification may not depend upon today's interest rate | Often has lower interest rate/monthly payment over balloon period than fixed rate; similar to hybrid ARM |
Drawbacks/Risks | Can have highest total interest cost over time; user may "buy" more rate stability than actually needed, increasing cost | Requires higher income to qualify; less affordable monthly payment; funds commited to payment cannot be used elsewhere | Stable payment for a number of years, then unpredictable; rates can jump by as much as 6 percentage points at first adjustment | Payments fluctuate at each rate change; unpredictable, rates can change as much as 2 percentage points at each adjustment | Loan fully due and payable when balloon period ends; must be paid off or refinanced in unknown market conditions |
Alternative strategy | Consider Hybrid ARM with appropriate fixed period | Consider 30-year term and prepaying loan to preserve cash-flow flexibility | Consider Fixed rate mortgage or longest possible fixed period, if loan hold period not known | Consider Hybrid ARM to ameliorate rate and payment risks for a given period | Consider Hybrid ARM to ensure continued loan availability |
These may be useful for… | Purchasing a home; first-time homebuyers; refinancing to improve cash flow/lower payment | Refinancing to lower total interest cost; retiring mortgage more quickly; building or rebuilding equity more quickly | Purchasing or refinancing when time horizon is seven years or shorter, and where borrower can handle increase in monthly payments | Purchasing or refinancing when interest rates are near top of cycle, and are likely to fall, or sale or refinance is anticipated within three years | Purchasing or refinancing when time horizon is three years or longer and home will be sold prior to end of balloon period |
Consider if | Buying or refinancing a home and planning on owning for longer than 10 years | Buying 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 scenario | Buying or refinancing when income can handle frequent payment changes and worst-case scenario for rates over a four-year period | Buying 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 desired | If 20-year term makes payment too high, whether 25-year term is available | Interest rate caps, for first and subsequent adjustments, worst-case scenario | A history of the Index the loan is keyed off, margin and caps | Whether or not there is any built-in refinancing option when the balloon period ends |
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