Adjustable Rate Loans

With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted from time to time to keep it in line with changing market rates. This means that when interest rates go up, your monthly mortgage payments may go up as well.

On the other hand, when interest rates go down, your monthly mortgage payments may also go down. Some ARMs may have an interest rate adjustment, but the monthly payment may not adjust; the difference or "shortfall" in interest may be added to the principal creating a negative amortizing loan. In essence, the principal balance of the loan increases rather than decreases. ARMs are attractive because they may initially offer a lower interest rate than fixed-rate mortgages.

Since the monthly payments on an ARM start out lower than those of a fixed-rate mortgage of the same amount, you can theoretically qualify for a larger loan. The chief concern, of course, is that your monthly payments may increase when interest rates go up.

You may want to consider an ARM if you are confident your income will rise enough in the coming years to comfortably handle any increase in payments. You may also want to consider an ARM if you plan to move in a few years and therefore are not so concerned about possible interest rate increases. Or if you need a lower initial rate to afford to buy the home you want.

One important thing to know when comparing ARMs is that the interest rate changes are always linked to some type of financial index. A financial index is a published number or percentage, such as the average interest rate or yield on Treasury bills. The most common types of financial index categories are the CD-Indexed ARMs (Certificate of Deposit), Treasury-Indexed ARMs, Cost of Funds-Indexed ARMs, LIBOR-Based ARMs and Initial Fixed-Period ARMs.

Federal Housing Administration Loans (FHA)

The Federal Housing Administration (FHA) is a federal agency within the U.S. Department of Housing and Urban Development (HUD). FHA's primary objective is to assist in providing housing opportunities for low to moderate-income families. FHA has both single family (1-4-unit homes) and multi-family (5 or more units) mortgage lending programs.

The agency does not generally provide the funds for the mortgages, but rather insures home mortgage loans made by private industry lenders such as mortgage bankers, savings & loans and banks. The insurance issued by FHA is paid for with premiums collected from the borrowers who use the programs. The mortgage insurance protects lenders and investors against loss resulting from borrower defaults and foreclosures. HUD/FHA offers a variety of home loan programs designed to meet the various needs of mortgage borrowers. With FHA insurance, you can purchase a home with a very low down payment (from 3 percent to 5 percent of the FHA appraisal value or the purchase price, whichever is lower).

FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region. You can find the regional loan limits at the Housing and Urban Development web site, or by contacting us.

Fixed Rate Loans

Fixed rate loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

The most common fixed rate loans are 15 year and 30 year mortgages. The easiest fixed-rate loan to qualify for, the 30-year mortgage gives you an excellent opportunity to keep your mortgage payments reasonable by making monthly payments over a long period of time. This mortgage loan may be ideal if you plan to remain in your home for years and wish to keep your housing expense low and use any extra cash for other purposes. This loan also provides maximum interest deduction for tax purposes.

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. A typical 30-year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Many borrowers are anxious to repay their mortgage sooner than 30 or even15 years. Lenders have responded to that demand by now offering 10 and 20 year fully amortizing fixed rate mortgages as a method to quickly re-pay your mortgage debt. An alternative strategy to the shorter term fixed loan is to obtain a 30-year mortgage term and make regular extra principal payments. These extra principal payments will help reduce the loan amount and reduce the term of the loan in a much more accelerated fashion.

Veterans Loans (VA)

The U.S. Department of Veterans' Affairs was established 52 years ago with the passage of the original GI Bill in 1944. Included in the many provisions of that bill was a program to assist returning World War II veterans with the purchase of a new home. The program has been expanded from time to time to include other veterans since then. The VA has assisted nearly 300,000 loans to veterans since that time. The assistance provided is a guarantee of a portion of a mortgage loan used to finance the purchase of a primary home. Each eligible veteran (see eligibility below) is granted a dollar amount of entitlement up to a maximum of $50,750. That entitlement can be used in place of a down payment on a home, which can result in a loan for 100% of the purchase price.

The maximum amount of a VA-Guaranteed loan is $240,000, thus the VA provides a 25% assistance to a purchase. The guarantee protects private lenders such as mortgage bankers, savings and loans or banks from default. If you are a qualified veteran, this can be an attractive mortgage program. To determine whether you are eligible, check with your nearest VA regional office.

Common Questions

The following may help in answering some of your questions.

Before choosing a loan type, what should you consider?

- How long do I plan to live in my home?

- How much money do I have for a down payment & any closing costs?

- What is my income and how much can I afford in monthly payments?

As an example, if you anticipate living in your home for many years, the interest rate may be a primary focus. On the other hand, if you expect to keep the house for a short period, the closing costs may play a bigger role in your final decision.

Other possible considerations that may guide you in the right direction is the certainty of a fixed mortgage payment, ending your mortgage debt before retirement or face your children’s college bill, maximum interest deduction for tax purposes, lower total finance charges, your overall credit rating, lower initial interest rates, and little or no cash down, just to name a few.

The bottom line – research, research, research and again, we strongly encourage you to discuss your unique and personal situation us, if we can be of assistance in any way please do not hesitate to contact us.