30-year fixed
If you plan to sell the property 12 + years, or you believe that interest rates will increase or remain neutral, a 30-year fixed loan is recommended.
This is the most popular loan by far. The loan amortizes over 30 years. While your total principal ("P") & interest ("I") components of your payment will never change until the loan is paid off, the proportion of P & I will change with each and every payment. For instance, on your first payment, ~ 99% of the P&I constitutes interest, and on your 360th payment (if you ever get there) ~ 99% of the P&I constitutes principal reduction.
You can opt to have this type of loan amortize on a 25-year or 20-year basis. The pricing has been very similar to that associated with the 30-year fixed. Because the price incentive is small or insignificant, you can easily accomplish the same objective (paying off your loan earlier) through regular prepayments. Be sure to ask us about the current pricing "spread."
15-year fixed
If you’re planning to own the property 12+ years, and you feel comfortable handling the ~ 25-30% higher payment this is a good option. It’s popular for people who are interested in refinancing, saving on interest and paying off the loan as soon as possible.This is the same type of loan as the 30-year fixed, except the amortization period is based upon 15 years/180 months. Because of this shortened time frame, your monthly P&I payment is usually ~ 30% higher than that on a 30-year fixed rate loan. The interest rate is usually 0.25% to 0.50% lower than the 30-year fixed, which is a significant price incentive.
7/23-year extendable balloon
If you feel you’ll own your property between 4 and 7 years this type of loan is a good fit.
This loan program amortizes over a 30-year period. The interest rate and payment are fixed for 7 years. At the end of year 7 (assuming you still own the property), the interest rate will be "re-set," the payment adjusted for the remaining term of 23 years, and those set of circumstances will not be subject to further adjustment over the remaining term. The interest rate will be reset at 0.50% above ~ the market 30-year fixed loan price, associated with 0 points at that time. This 23-year "extension" is predicated upon the following conditions, which are required to be corroborated at the end of year 7. • You must still be the owner and OCCUPANT of the property
• There must be no "junior" liens against the property, such as a home equity loan/line.
• In the preceding 12 months, you did not make a 30+ day late payment on the mortgage
• The reset interest rate cannot be more than 5.0% above your start rate.
• If any of these conditions are not satisfied at the end of year 7, the loan "balloons."
You must payoff the loan. Of course, you always have the option to refinance.
5/25-year extendable balloon
If you expect to own the property for 3-5 years this loan program is a viable option.This type of loan has the same terms & conditions as the 7/23, except the "re-set" occurs at the end of year 5, and the adjustment remains in effect for 25 years. There is usually a ~ 0.125% price incentive versus the 7/23.
10/1, 7/1, 5/1, & 3/1-year ARMs
If you feel that you’ll own the property for 3 to 12 years this loan program is one to consider.
These loan programs are very popular right now with relocation clients and with people who believe interest rates will be declining in the future. The 10/1-year loan amortizes on a 30-year basis, and for the initial 10 years the rate and P&I payment are fixed. At the end of year 10, the interest rate will adjust to the lower of "index + margin" or "caps" (assuming interest rates have gone up). Call our office for the current index, margin, and caps — these are subject to change on a daily basis. Once the rate & payment have been adjusted, that condition will remain in effect for 1 year. The rate & payment will adjust every year thereafter until the mortgage is paid off. There is usually a significant 0.375% to 0.625% interest rate incentive versus the 30-year fixed price.
The 7/1.5/1 and 3/1-year ARM loan programs work exactly as the 10/1 ARM, except the first adjustment comes at the end of 7, 5, or 3 years. The 7/1 ARM is priced ~ 0.125% below the 10/1 ARM, the 5/1 ARM is priced ~ 0.125% below the 7/1 ARM, the 3/1 ARM is priced ~ 0.125% below the 5/1 ARM.
All of the above products are offered as interest only. This means that you will have a lower interest only payment for the fixed period. After that initial period your rate can adjust but you will start paying down the principal. These are good loans in order to keep your monthly payments down but will not help you build equity in your house.