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| Years you plan to stay in the house | Recommended program |
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| 1-3 | 3/1 ARM, 1 year ARM or 6 month ARM |
| 3-5 | 5/1 ARM |
| 5-7 | 7/1 ARM |
| 7-10 | 10/1 ARM, 30 year fixed or 15 year fixed |
| 10+ |
30 year fixed or 15 year fixed |
Fixed rate fully amortizing 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.
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.
With the aging of the "Baby Boom Generation", many consumers are anxious to repay their mortgage sooner than 30/15 years. Recently, lenders have begun offering 10 and 20 year fully amortizing fixed rate mortgages as a method to quickly pay mortgage debt. An alternate strategy is to obtain a 30 year fixed mortgage, but make regular extra principal payments; any extra principal payments will help reduce the loan amount and reduce the term of the loan.
Most fixed rate mortgages originated by primary lenders
and mortgage brokers are sold in the secondary mortgage. The loans are
aggregated with other fixed rate mortgages with similar characteristics, such
as note rate, term, etc., and converted into mortgage backed securities and
bonds. These mortgage backed securities become part, the larger capital
markets which also includes government securities, corporate bonds and
municipal bonds. The yields on mortgage backed securities track other
capital market instruments with similar maturities. Generally, mortgage
backed securities that include 30 year fixed mortgages track the yields on the
10 year maturity U.S. government securities.
Adjustable Rate Mortgages (ARMs)
ARMs are long term mortgages that have periodic interest rate adjustments; ARMs are also known as variable rate mortgages (VRMs). Because ARMs are generally fully amortizing loans, the monthly payments adjust in tangent with the interest rate adjustment to assure that the loan will be paid in full at the end of the loan term. 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 increase rather than decreases. ARMs have several important features which are detailed below and are generally outlined in the mortgage note:
Many ARMs originated in the primary market find their way to the portfolios of savings and loans or commercial banks. ARMs are an appealing asset for depository institutions because the fully indexed rate on ARMs can be structured to follow the interest rates paid on deposits. Some ARMs do find their way into the secondary market and, like fixed rate mortgages, can be aggregated into mortgage backed securities and sold as a capital market debt instrument.
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Balloon Mortgages Balloons are like 30 year fixed rate mortgages, but after the first five or seven years, you have to repay the entire loan balance. |
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Advantages
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| It is easier to qualify. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Since a balloon is effectively a very short loan (five to seven years) the lender is taking less risk. This makes it a lot easier for the lender to qualify you for it. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| It gives you five or seven years of protection from rate increases. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| If the lender is taking less risk, they are willing to loan you more money. So, if you are set on buying your dream home and you can barely afford it, this can be very helpful. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Your initial interest rate is lower than a 30 year fixed loan. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Since the rate is fixed for only five or seven years, the lender doesn't need to charge as high of an interest rate as they do on a 15 or 30 year fixed rate mortgage. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Disadvantages | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Your interest rate might go up. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| If, after the five or seven years are up, you have to refinance the mortgage, your payments will increase if rates have gone up. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| You are forced to refinance or sell in five or seven years. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Common types of balloon mortgages | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 5 year balloon | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A loan with a fixed interest rate and monthly payments in which the balance of the loan becomes due after 5 years in one "balloon" payment. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 7 year balloon | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A loan with a fixed interest rate and monthly payments in which the balance of the loan becomes due after 7 years in one "balloon" payment. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Example $125,000 loan | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Subprime Mortgages
As second mortgages present a higher lender risk than first mortgages, so too, do loans to those whose credit is bruised, or those with higher Debt-to-Income ratios. Derogatory credit items can include such things as late payments, collections, liens, judgments, and charged off accounts. Also listed on the credit report is a number, a numerical score, that decreases as the number of derogatory items and factors in the credit report increases. There are different scoring systems, including ones from BEACON, FICO, and EMPIRICA, but they serve the same function, that is, to reduce the credit report to a numerical score. Some lenders (fairly or unfairly) consider only this score in their lending decisions. Other lenders will use the credit score as one of the factors in making a lending decision, while looking at the overall content of the credit report.
Other factors, such as carrying balances on your open credit accounts that are considered too high (e.g., having your credit cards maxed out, or nearly so), or having too many open credit accounts, even with low balances (still giving you the opportunity to run up significant debt), can lower your credit score. B-C-D lenders use these credit scores along with a credit-scoring matrix to rate or grade the borrower according to the amount of derogatory items on the credit report. The more derogatory the credit report, the higher the rate and (usually) the lower the allowed Loan-to-Value, though Debt-to-Income ratios can be quite lenient (as high as 50%, sometimes even higher).
Typical B-C-D lending guidelines will allow for some late payments on the credit report, including late mortgage payments. There are even programs (given enough equity in one's home) that can pull a homeowner out of foreclosure, or pay off a Chapter 13 bankruptcy. However, B-C-D lending rates are higher not only because of the increased risk. There is an additional reason.
While lenders allow much more leniency in underwriting guidelines with B-C-D lending (and charge, accordingly), they know that most of these loans will be paid off before they ever reach their full term. That's because B-C-D loans are a "BAND-AID" approach to financing, to help a borrower accomplish immediate goals, right now, with an eye toward getting the credit report cleaned up in order to qualify for the best possible rates in the future. Since one of the goals of Hometown Mortgage is to help you map out a plan to accomplish just that, in as timely a manner as possible, and lenders know this, they need to make more of their profit on the front end, as most derogatory credit can be cleaned up in a couple of years. Therefore, use B-C-D financing today, if need be, to help while you get control of your financial situation, and as soon as your credit and circumstances will allow, refinance to get the best going market rates.
Some of the larger banks have jumped onto the Subprime Lending bandwagon. However, they still "think" like banks, and many of their programs just don't have the flexibility and variety that an independent brokerage such as Hometown Mortgage can provide. Besides providing a full range of traditional financing products, we specialize in helping the more difficult-to-qualify clients obtain the financing they need (whether for a purchase or refinance), and to provide the knowledge and information necessary to help them get back on track with their credit, so they can qualify for the best possible rates in the future.
If you're in the market to purchase a new home or refinance you existing loan, especially if you have past or current credit problems, give us a call to let us show you what we can do for you.
No Income Qualification
These loans are designed to allow the borrower to qualify without verification of their income. These loans are a great option for the self-employed borrower. These loans typically have a higher interest rate than a conforming or jumbo loan as well as a higher minimum down payment.
No Ratio Loans
These loans allow qualifying without stating your income. Like No Income Qualification loans, No Ratio loans have a higher interest rate than a conforming or jumbo loan as well as a higher minimum down payment.
Second Homes
These loans are designed to allow borrowers to purchase another residence. They are great for part-time residents. They have similar parameters and qualifying guidelines as a primary residence, but they typically have a minimum down payment of 10%.
Investment Property
These loans allow for the purchase of a property to lease out or to rehabilitate for sale. Investment loans typically require a 10 to 30% down payment as well as a higher interest rate than a primary residence. These loans usually have a higher interest rate than a primary residence.
Other Programs:
5% Down No Mortgage Insurance
Conforming loans $0 to $322,700.00
Jumbo loans $322,701.00 to $2 million
FHA loans $0 to $144,336.00
VA loans $0 to $203,000.00
(FHA and VA loan limits include upfront mortgage insurance premium or financed funding fee)
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Hometown Mortgage - 1710 Westminster - Denton, TX 76205 Phone: 940-243-5000 - Fax: 940-387-5043
© Copyright 2001, Hometown Mortgage. All Rights Reserved. TX Mortgage Brokers License# 15411
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