Understanding Mortgage Loans

Our current mortgage markets offer a large variety of loan products that allow the homebuyer, refinance candidate or home equity borrower a lot of flexibility.  The titles and guideline of these options can become confusing, especially as new "twists" are introduced to appeal to the niche borrower. You can make sense of these loan types, however, if you understand the basic principles that govern all mortgage finanancing. We do, however recommend that you consider speaking, early on, with a qualified mortgage professional.

Basic foundations of all Mortgage Loans

Your home is used as security to back up the loan. A lender can force sale of your property if the borrower defaults by failing to make scheduled payments. The larger the loan amount relative to the appraised value of your home, the more risk the lender assumes, which normally leads to a higher interest rate to the borrower.

The required loan payment is usually a bit larger than the interest due so that some of the loan principal is repaid with each payment. This process is called amortization and is why most mortgage loans can be paid off when the agreed apon number of payments are made.

Also, it helps to know that all mortgage loans have one of the following features:

a fixed payment and fixed interest rate — fixed rate mortgages.
a fixed rate but variable payment — graduated payment mortgages.
Shorter Fixed term with a set margin — adjustable rate mortgages.

As you learn more about the types of financing available, you will notice that some loans appear to have more favorable terms than others. That may indicate that those loans are, indeed, bargains but, usually it means that those loans have some feature that is less appealing to borrowers. For example, shorter-term loans often have slightly lower interest rates compared to longer-term loans. However, the monthly payment for the same amount of principal may be higher because of the shorter term. Variable rate loans usually have much lower interest rates to compensate for the risk the borrower accepts. That risk is that interest rates may rise in the future.

You may want to choose a loan type based on what you consider your greatest needs and speak with a mortgage lender or broker that understands these needs.

Under $200,000  $200,000 - $359,650 $359,650 - $650,000 Over $650,000

Under $200,000  $200,000 - $359,650 $359,650 - $650,000 Over $650,000

INTEREST-ONLY LOANS

Interest only home loans offer consumers greater purchasing power, increased cash flow and a number of other benefits. Not for everyone, but extremely beneficial to the people these loans are tailored for. The mortgage market has a number of programs available to consumers and below is a list of some of the most popular loan types:

1 MONTH ARM - INTEREST ONLY OPTION

The interest rate on this loan is the sum of the LIBOR index plus a margin rounded to the nearest one-eighth of one percentage point, (0.125%). The margin will not change throughout the term of the loan. the index value will be adjusted every month, which will cause the interest rate to be adjusted every month.

6 MONTH ARM - INTEREST ONLY OPTION

The interest rate on this loan is the sum of the LIBOR index plus a margin rounded to the nearest one-eighth of one percentage point, (0.125%). The margin will not change throughout the term of the loan. the index value will be adjusted every six months, which will cause the interest rate to be adjusted every six months.

3 YEAR ARM - INTEREST ONLY OPTION

The interest rate is fixed for the first three years of the loan term. Years 4 thru 30 the interest rate is adjusted every year to the sum of the LIBOR index plus a margin rounded to the nearest one-eighth of one percentage point, (0.125%). The margin will not change throughout the term of the loan. During the first five years of the loan, the borrower is offered an interest only payment option and a principal and interest payment option. Years 6 thru 30 require a principal and interest payment.

5 YEAR ARM - INTEREST ONLY OPTION

The interest rate is fixed for the first five years of the loan term. Years 6 thru 30 the interest rate is adjusted every year to the sum of the LIBOR index plus a margin rounded to the nearest one-eighth of one percentage point, (0.125%). The margin will not change throughout the term of the loan. During the first five years of the loan, the borrower is offered an interest only payment option and a principal and interest payment option. Years 6 thru 30 require a principal and interest payment.

7 YEAR ARM - INTEREST ONLY OPTION

The interest rate is fixed for the first seven years of the loan term. Years 8 thru 30 the interest rate is adjusted every year to the sum of the LIBOR index plus a margin rounded to the nearest one-eighth of one percentage point, (0.125%). The margin will not change throughout the term of the loan. During the first five years of the loan, the borrower is offered an interest only payment option and a principal and interest payment option. Years 6 thru 30 require a principal and interest payment.

MTA - Option ARM

This MTA ( Monthly Treasury Average Index ) based Adjustable Rate Mortgage offers the borrower several payment options. These options include a minimum payment and a principal and interest payment that is adjusted monthly. Under certain conditions the borrower may be offered an interest only payment option.

The interest rate on the loan is the sum of the MTA index plus a margin. The margin will not change throughout the term of the loan. The index value will be adjusted monthly, which will cause the interest rate to be adjusted monthly.

The minimum payment option is adjusted annually with a payment cap adjustment of 7.5% of the prior years payment. Every five years the payment cap is suspended in order to insure that the loan will be paid off at the end of the loan term. Because the interest rate will be adjusted monthly, the minmum payment may or may not cover the amount of interest being charged. If the minimum payment does not cover the amount of interest being charged, paying the minimum will result in negitive amortization. This simply means that the balance on your loan will increase in the amount of the difference between the minimum payment and the interest charge on the loan that month.

The principal and interest payment option is available every month. Since the interest rate is adjusted monthly, this payment is adjusted accordingly. This payment option will pay the loan off based on a 30 year amortization.

The interest only option is not available every month. This option is only available when the minimum payment does not cover all of the interest charge that month.

COFI - Option ARM

This COFI (Cost Of Funds Index) based Adjustable Rate Mortgage offers the borrower several payment options. These options include a minimum payment and a principal and interest payment that is adjusted monthly. Under certain conditions the borrower may be offered an interest only payment option.

The interest rate on the loan is the sum of the COFI index plus a margin. The margin will not change throughout the term of the loan. The index value will be adjusted monthly, which will cause the interest rate to be adjusted monthly.

The minimum payment option is adjusted annually with a payment cap adjustment of 7.5% of the prior years payment. Every five years the payment cap is suspended in order to insure that the loan will be paid off at the end of the loan term. Because the interest rate will be adjusted monthly, the minmum payment may or may not cover the amount of interest being charged. If the minimum payment does not cover the amount of interest being charged, paying the minimum will result in negitive amortization. This simply means that the balance on your loan will increase in the amount of the difference between the minimum payment and the interest charge on the loan that month.

The principal and interest payment option is available every month. Since the interest rate is adjusted monthly, this payment is adjusted accordingly. This payment option will pay the loan off based on a 30 year amortization.

The interest only option is not available every month. This option is only available when the minimum payment does not cover all of the interest charge that month.

COSI - Option ARM

This COSI (Cost Of Savings Index) based Adjustable Rate Mortgage offers the borrower several payment options. These options include a minimum payment and a principal and interest payment that is adjusted monthly. Under certain conditions the borrower may be offered an interest only payment option.

The interest rate on the loan is the sum of the COSI index plus a margin. The margin will not change throughout the term of the loan. The index value will be adjusted monthly, which will cause the interest rate to be adjusted monthly.

The minimum payment option is adjusted annually with a payment cap adjustment of 7.5% of the prior years payment. Every five years the payment cap is suspended in order to insure that the loan will be paid off at the end of the loan term. Because the interest rate will be adjusted monthly, the minmum payment may or may not cover the amount of interest being charged. If the minimum payment does not cover the amount of interest being charged, paying the minimum will result in negitive amortization. This simply means that the balance on your loan will increase in the amount of the difference between the minimum payment and the interest charge on the loan that month.

The principal and interest payment option is available every month. Since the interest rate is adjusted monthly, this payment is adjusted accordingly. This payment option will pay the loan off based on a 30 year amortization.

The interest only option is not available every month. This option is only available when the minimum payment does not cover all of the interest charge that month.

10/30 Year Interest Only Arm

* The initial payments are interest only for the first 10 years.
* After the completion of the interest only period, the unpaid balance is fully amortized over the remaining term of the loan.
* The Borrower may make voluntary principal payments during the interest only period. The required interest only payment will be reduced to reflect the decrease in the principal unpaid balance.

FIXED RATE LOANS

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 40 years, 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.) Most lenders set you up with a monthly payment at the loan closing. Then, offer you the biweekly option shortly after you have proven a timely payment history.

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.

What’s the best program for me?

There isn't a single or simple answer to this question. The right type of mortgage for you depends on many different factors:

- Your current financial picture.
- How you expect your finances to change.
- How long you intend to keep your house.
- How comfortable you are with your mortgage payment changing.
- For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage -- but your payments could get higher when the interest rate changes.

The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with a mortgage professional.

Click here to request a quote on a fixed rate mortgage