Loan Program Options - wave3.com-Louisville News, Weather & Sports

Loan Program Options

The mortgage market is huge, providing hundreds of products to borrowers. This section will address many of the common products available, but the list is not comprehensive. If you have a need we haven’t listed, contact one of our Loan Officers for additional information.

Homebuyers are understandably concerned about interest rates, but most homebuyers underestimate the importance of choosing the right mortgage. A loan that is customized to your needs can provide huge savings, while choosing the wrong mortgage can be very expensive.

Fixed-Rate Products
These are the most popular mortgages. Your rate is fixed for the entire term of the loan. You may select 10, 15, 20, 25, and 30 year loans. Fixed rate products are available in Conventional, FHA, and VA loans.

  • Advantages: Very stable; principal and interest never change for the life of the loan. (Only taxes and insurance may change.) Good choice for those who plan to keep the loan for a long time and need a stable payment. Especially attractive when interest rates are low.
  • Cautions: Borrowers who plan to have the loan for only a few years could save money with an adjustable rate or balloon mortgage.

Adjustable-Rate Products
Popular for people who plan to move or refinance in the foreseeable future. Also popular for people who desire a lower interest rate, or who want to increase the amount of their loan qualification. These loans become more popular as the interest rates rise.

There is a wide variety of adjustable rate loans (ARMs). For example, a 1/1 ARM means the initial rate is guaranteed for one year, and the rate adjusts every year thereafter. You may prefer to choose a 3/1 ARM, where the initial rate is guaranteed for 3 years, then adjusts every year thereafter. Depending on the loan you choose, you may be able to select from the following menu: 1/1, 3/1, 5/1, 7/1, 10/1. All these loans are typically based on a 30-year amortization.

Your ARM may have a convertible feature that for a fee turns your adjustable rate into a fixed rate mortgage at your request. ARMs also have “caps” and “floors” that determine the maximum adjustment as well as the minimum and maximum rates for the life of the loan. 

  • Advantages: Increases level of qualification. Provides lower initial rate than a fixed-rate loan. Subsequent rates may be lower if interest rates decline.
  • Cautions: Ensure you can afford a “worst case” scenario if rates increase.

Balloons
Very similar to fixed rate mortgages with two important differences. A loan with a balloon payment must be paid or refinanced at the end of a loan term, and the loan is not convertible.

You’ll typically find balloons for 5 and 7 years. Both loans are based on a 30-year amortization, but the balance at the end of the loan term must be paid or refinanced.

  • Advantages: Increases level of qualification. Provides lower rate than a 30-year fixed rate loan.
  • Cautions: Ensure you can pay the loan off or you have the ability to refinance at the end of your loan term.

Buy-Downs
Don’t confuse the buy-down feature with “buying down” the rate. Though similar sounding, they are entirely different. Buying down the rate refers to the common practice of paying discount points to obtain a rate lower than the listed rate. A “buy-down” is a temporary reduction in rate for a specified time. A 2/1 buy-down means the rate for the first year of the mortgage will be 2% less than the actual note rate, and the rate for the second year will be 1% less than the note rate. In the third year and subsequent years the borrower will pay the actual note rate. For example, a borrower with an 8% fixed rate loan with a 2/1 buy-down will have an interest rate of 6% the first year, 7% the second year, and 8% for all years thereafter.

There are numerous combinations for buy-down options, but the most common are the 2/1 and the 3/2/1. In some cases the borrowers can combine an adjustable rate with a buy-down. The low first-year rate on an adjustable-rate mortgage, combined with a 3/2/1 buy-down, can produce a very low rate the first year of the loan. Remember, however, that subsequent years of the loan will be subject to both the buy-down adjustment and the adjustable rate adjustment.

  • Advantages: Lower payments initially. May increase qualification limit.
  • Cautions: Ensure your budget will accommodate the higher payments as the interest rate increases.
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