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(209) 839-0500
office
(209) 343-3819 fax
Maxine Ellis
Owner/Certified Financial Lender
"Let’s face it…you wouldn’t make a stock, car or even DVD player purchase with little input or investigation, yet many people think the only thing to know about a mortgage is the rate. Nothing is further from the truth."
There are an infinite number of mortgage loan options out there. Yet most people end up with mortgage loans they don't understand by shopping only for today's lowest rates.
The simple fact is that the right rate on the wrong loan can cost you thousands of dollars. More importantly, the right rate on the right loan can elevate your financial status. At 1st Freedom Mortgage LLC we look at your mortgage as an investment tool. Your mortgage can be the key to achieving all of your short and long-term financial goals.
As a rule of thumb, the right type of mortgage mostly depends on how long you plan on staying in the house and the amount of monthly payment you can comfortably afford.
If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. Adjustable Rate Mortgages traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years. Because of a lower interest rate it is easy to qualify for these type of mortgages. However, don't accept the Adjustable Rate Mortgage unless you can afford the maximum possible monthly payment.
Generally, you can start to consider 15 or 30 year fixed rate mortgages if you plan to stay in your home for more than seven years.
The Most Common Types of Mortgage Available:
CONVENTIONAL LOANS
Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that result in the availability of mortgage credit for Americans.
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announce new loan limits every year.
B/C Loans
Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac (conforming loans) are called 'B', 'C' and 'D' paper loans vs. 'A' paper conforming loans. B/C loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming "A" financing. The interest rates and programs vary, based upon many factors of the borrower's financial situation and credit history.
Fixed Rate Mortgages
Any Fixed Rate Mortgage locks in the interest rate for the length of the loan. While you can always refinance, a fixed rate insulates you from increasing rates, but keeps you from automatically enjoying rate declines.
With a fixed rate mortgage loan loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get.
The most popular mortgage terms are 30 and 15 years. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan, as illustrated on our graph:
The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. 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.
Reverse Mortgage
A reverse mortgage is a special type of home loan that allows homeowners, ages 62 and older, to convert part of their home's equity into tax-free income. In a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner may choose how this money is received: in a lump sum, fixed monthly payments, a line of credit, or a combination of these. When the homeowner sells their home or no longer uses it as their principal residence, they (or their estate) will repay the loan. Any remaining equity in the home will go to the former homeowner, or their heirs.
Some of the additional benefits include:
• Reverse Mortgage benefits are NOT subject to Federal or State INCOME TAXES
• Reverse Mortgages will NOT TRIGGER the THRESHOLDS on social security income.
• Reverse Mortgages DO NOT have to be REPAID as long as you live in your home.
• BEST of all, there are NO MONTHLY PAYMENTS and you continue to OWN YOUR HOME.
Interest-only Mortgages
Unlike traditional home loans, the monthly payment covers only interest for a set amount of time, such as 10 years. After that time, the payment will increase (often markedly) and the loan is paid off by reducing the principal due each month for another 20 years. Interest-only loans are increasingly popular today allowing buyers to get into a higher-priced home than they might otherwise be able to afford, but there are obvious risks. This type of mortgage is not recommended for first-time buyers, or those not familiar with the advantages and drawbacks of paying for a house over time.
Negatively amortizing loans
Some types of ARMs offer payment caps rather than interest rate caps, which limit the amount the monthly payment can increase. If a loan has payment cap but has no periodic interest rate cap, then the loan may become negatively amortized: if the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance, so the loan balance increases. However, you always have the option to pay the minimum monthly payment, or the fully amortized amount due.
The advantage of negatively amortizing loans is that you can control cash flow (relatively stable payment), take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now (because of natural inflation). This makes such loans a great tool for homeowners as long as you understand the mechanics of what's going on.
With most ARMs, the interest rate can adjust every six months, once a year, every three years, or every five years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on.
Most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the loan, which could be one month or a year or more. It is also known as teaser rate.
All ARMs are available with
30-year terms and some with 15-year terms.
Adjustable rate mortgages generally have a lower initial interest rate
than fixed rate loans.
Option ARM Loans
One of the most creative products that doesn't require a set payment each month is the option ARM. After the first payment, you get four payment options to choose from each month: your lender sends you a monthly statement offering a minimum payment (1), interest-only payment (2), 30-year amortized payment (3) or 15-year amortized payment (4).
Split or PiggyBack Loans
Split or PiggyBack loans can be used to get into a home with little to no money down and avoid paying PMI. With this mortgage you’re essentially splitting the purchase price into two mortgage loans covering 80% and 20% respectively. You pay more interest on the second loan, but this may allow you to have a relatively low monthly payment, avoiding a down payment and PMI.
Adjustable-Rate Mortgages (ARM)
A Variable or adjustable rate loan is loan whose interest rate, and accordingly monthly payments, fluctuate over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.
The margin is fixed percentage points added to the index to compute the interest rate. The result will then be rounded to the nearest one-eighth of a percent.
The margins remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates. Lenders use a variety of margins depending upon the loan program and adjustment periods.
Most ARMs have an interest rate caps to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at one time.
Hybrid Loans
As its name suggests, a Hybrid loan combines the characteristics of a fixed rate loan with an adjustable rate loan. You start by carrying a fixed interest rate for a certain period of time, then move to an adjustable rate. The lower rate can be fixed for a varying number of years with the best rate available with a shorter fixed time period. This is a loan you may want to avoid if you plan to own your home (vs. trading up with conversion).
Stated Income, Low-Down, No Document Loans
This type of loan may be recommended to you if you have trouble verifying regular income. Lenders don’t require proof of income or assets and no debt-to-income ratio is used. To take this loan, you will pay a higher interest rate because of the risk to the lender and you will pay a bigger down payment. You will also have to meet higher credit standards.
Balloon Loans
If you are going to be relocated in a specific period of time, this may be a smart loan for you. It carries a low interest rate for 3, 5, 7 or 10 years when the full balance then becomes due.
Balloon loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. Usually they have terms of 3, 5, and 7 years.
The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30- and 15- year mortgages resulting in lower monthly payments. The disadvantage is that at the end of the term you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.
Balloon loans with refinancing option allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan -- based upon the outstanding principal balance -- if certain conditions are met. If you refinance the loan at maturity you need not be requalified, nor the property reapproved. The interest rate on the new loan is a current rate at the time of conversion. There might be a minimal processing fee to obtain the new loan. The most popular terms are 5/25 Balloon, and 7/23 Balloon.
GOVERNMENT LOANS
FHA Loans
The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development (HUD). FHA administers various mortgage loan programs that have lower down payment requirements and can be easier to qualify for than conventional loans. FHA loans have statutory limits.
VA Loans
VA loans are guaranteed by the U.S. Department of Veterans Affairs allowing veterans and service persons to obtain home loans with favorable terms and often without a down payment. While it’s easier to qualify for a VA loan than a conventional loan, lenders generally limit the maximum VA loan to $ 203,000. The VA doesn’t make the loans, but recommends you via a certificate of eligibility to your lender.
RHS Loans
The Rural Housing Service (RHS) of the U.S. Department of Agriculture guarantees loans for rural residents with minimal closing costs and no down payment.
