Delaware Real Estate and Mortgage Broker Articles

Fixed Rate Loans

The interest rate is fixed, or unchanging, for the life of the loan. Fixed rate mortgages are available with a number of different repayment terms, but the most common are 30-Year, 20-Year and 15-Year.

 

• 30-Year Fixed:
  This is the most common repayment term and it allows for the lowest monthly payments. This is a good choice if you want to minimize your monthly housing payment to allow for upkeep, repairs, or other expenses. Because you pay slowly over a long period of time, however, the total interest you pay over the life of the loan is greater than the interest you pay for a 15 or 20-year fixed rate.
  
  Who should consider this type of loan?
  This loan is a good choice for people who would like low monthly payments, who plan to buy and live in a home for a long period of time, or who need the largest possible interest deduction on their federal income taxes.
  
  
• 20-Year Fixed and 15-Year Fixed:
  These shorter repayment terms often offer a lower interest rate but will have higher monthly payments than the longer term loan. The shorter terms allow you to pay off the mortgage much more quickly so that you save in interest over the life of the mortgage and are free of debt sooner.
  
  Who should consider these types of loans?
  These loans are a good choice for people who will retire in less than 30 years. They may also be appropriate for those who anticipate a large financial burden in the next 15 or 20 years, such as children entering college.

 

The interest rate changes, or "adjusts," at predetermined times. Often these Adjustable Rate Mortgages (ARMs) offer a lower initial interest rate (and therefore lower initial monthly payments) so that you can borrow more money than you could with a fixed rate loan. However, when the interest rate goes up or down, so does your monthly payment.

 

How do they adjust the rate?
The interest rate adjustments are usually tied to a certain financial index (such as the Cost of Funds, the average yield of U.S. Treasury securities, a Certificate of Deposit index, or the London Interbank Offered Rate) and may adjust every month, six months, one year or three years. These indexed loans sometimes allow you to convert to a fixed rate at certain times during the life of the loan.

 

Other ARMs, called Initial Fixed Period ARMs, offer long initial fixed rate periods, such as five, seven, or ten years. After this initial period, the loan becomes an ARM as described above.

 

There are two types of limits, or caps, on your payments with an ARM. These limits can be placed on your interest rate or your payment amount. It works the same either way. The first kind of cap determines how much the interest rate or monthly payment can be changed at any one time. Let's say your ARM has an initial interest rate of 5%, adjusts annually, and has a periodic rate cap of 2. This means that at the end of the first year when it's time to adjust your interest rate for the first time, the highest rate it can be adjusted to is 7%. If it adjusts to 7%, then after the second year the highest rate it can be adjusted to is 9%, and so on. ARMs do not necessarily adjust to the maximum cap allowed for the adjustment. If you are interested in an ARM loan, your loan originator will explain to you exactly how the interest rate calculations work.

 

The second cap determines the maximum interest rate or monthly payment you have at any time over the life of the loan. Using our example in the previous paragraph, your initial rate is 5%, the annual cap is 2% and the lifetime cap is 6%. The worst case scenario is an interest rate of 11%. Keep in mind, your principal balance will be reduced because you have been making monthly payments for several years which will be reducing your principal balance. When considering an Adjustable Rate Mortgage, you should determine what your payments would be at the lifetime maximum and decide if you will be able to comfortably afford such a loan.

 

The indexed ARMs may be a good choice for people who anticipate a steady and significant rise in their income over time, and who know that they can comfortably afford any worst case scenario adjustments. This may allow them to borrow more money now than with a fixed rate loan so that they can afford the house they want.

 

The initial fixed period loans may be appropriate for someone who anticipates selling their home in five, seven, or ten years and so is not concerned about the possible rate increases after the fixed period ends.

 

These loans are insured by one of three government agencies: the Federal Housing Administration (FHA), the Veterans Administration (VA), or the Rural Housing Service (RHS). Lenders for these types of loans must be approved and all require certain minimum standards to qualify for the loan program. The government insures these loans to make it easier for private lenders to offer them to low- or moderate-income people. · FHA Loans allow you to make a down payment of 3% or 5% of the FHA's appraisal value or the purchase price, whichever is lower. · VA Loans allow qualified veterans to make no down payment, and they have more flexible qualification requirements than other government loans. · RHS Loans are no-down-payment, low-interest loans that are intended for low- and moderate-income people who live in rural areas or small towns.

 

Veterans or low- or modest-income borrowers, or borrowers with marginal credit.

 

These loans offer low interest rates for the first five, seven, or ten years. However, the outstanding balance must be either refinanced or paid in full at the end of the initial five, seven, or ten-year period. A fee is usually required to refinance and your lender is not required to extend the loan after the balloon date, although some lenders may do so.

 

If you are certain that you can afford to refinance or pay the balance after the balloon date, or if you are certain that you will sell your property before the balloon date, this loan may be a good choice for you. Call our office to find out all of the information before you decide.

 

Fannie Mae Loans offer more flexible qualification requirements than standard loan programs do. If you have a limited credit history or have a modest income, ask us if you may qualify for one of these loans.

 

These loans offer an opportunity for people with marginal credit to purchase a home. The interest rate will be higher than that of a conventional loan. There are many programs available depending on a borrower's credit score.