The traditional fixed rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This type of mortgage is structured, or "amortized" so that it will be completely paid off by the end of the loan term. There are also "bi-weekly" 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.)
Even though you have a fixed rate mortgage, your monthly payment may vary if you have an "impound account". In addition to the monthly loan payment, some lenders collect additional money each month (from folks who put less than 20% cash down when purchasing their home) for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound account by the lender who uses it to pay the borrowers' property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.
Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.
The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that's fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes.
Homeowners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to live long in their homes. By getting a lower rate and lower monthly payments than with a 30- or 15-year loan, they can break even more quickly on refinancing costs, such as title insurance and the appraisal fee. Since the monthly payment will be lower, borrowers can make extra payments and pay off the loan early, saving thousands during the years they have the loan.
The VA Loan provides veterans with a federally guaranteed home loan which requires no down payment. This program was designed to provide housing and assistance for veterans and their families.
The Veterans Administration provides insurance to lenders in the case that you default on a loan. Because the mortgage is guaranteed, lenders will offer a lower interest rate and terms than a conventional home loan. VA home loans are available in all 50 states. A VA loan may also have reduced closing costs and no prepayment penalties.
Additionally there are services that may be offered to veterans in danger of defaulting on their loans. VA home loans are available to military personal that have either served 181 days during peacetime, 90 days during war, or a spouse of serviceman either killed or missing in action.
To understand an ARM, you must have a working knowledge of its components. Those components are:
Index: A financial indicator that rises and falls, based primarily on economic fluctuations. It is usually an indicator and is therefore the basis of all future interest adjustments on the loan. Mortgage lenders currently use a variety of indexes.
Margin: A lender's loan cost plus profit. The margin is added to the index to determine the interest rate because the index is the cost of funds and the margin is the lender's cost of doing business plus profit.
Initial Interest: The rate during the initial period of the loan, which is sometimes lower than the note rate. This initial interest may be a teaser rate, an unusually low rate to entice buyers and allow them to more readily qualify for the loan.
Note Rate: The actual interest rate charged for a particular loan program.
Adjustment Period: The interval at which the interest is scheduled to change during the life of the loan (e.g. annually).
Interest Rate Caps: Limit placed on the up-and-down movement of the interest rate, specified per period adjustment and lifetime adjustment (e.g. a cap of 2 and 6 means 2% interest increase maximum per adjustment with a 6% interest increase maximum over the life of the loan).
Negative Amortization: Occurs when a payment is insufficient to cover the interest on a loan. The shortfall amount is added back onto the principal balance.
Convertibility: The option to change from an ARM to a fixed-rate loan. A conversion fee may be charged.
Carryover: Interest rate increases in excess of the amount allowed by the caps that can be applied at later interest rate adjustments (a component that most newer ARMs are deleting).
A balloon mortgage has an interest rate that is fixed for an initial amount of time. At the end of the term, the remaining principal balance is due. At this time, the borrower has a choice to either refinance or pay off the remaining balance.
There are no penalties to paying off a balloon mortgage loan before it is due. Borrowers may refinance at any time during the life of the loan.
Balloon loans typically have either 5 or 7-year terms. For example, a 7-year balloon mortgage with an interest rate of 7.5% would feature this interest rate for the entire term. After 7 years, the remaining loan balance would become due.
Getting a loan for fix and flip projects involves securing short-term financing aimed at real estate investors. These loans are designed to cover both the purchase price of a property and the costs associated with renovations and repairs.
A bridge loan is a type of short-term financing that serves as an interim solution for individuals or businesses until permanent financing is secured or an existing obligation is removed.
Typically used in real estate transactions, bridge loans help to "bridge" the gap between the sale of one property and the purchase of another, providing immediate cash flow to facilitate a smooth transition.
A second mortgage is a loan taken out on a property that is already mortgaged, using the home's equity as collateral.
This type of loan is subordinate to the primary mortgage, meaning in the event of default, the primary mortgage gets paid off first.
Land loans, or lot loans, are financing options specifically designed for the purchase of a plot of land. Unlike mortgages for built properties, land loans are used to buy raw, undeveloped land without any existing structures.
A Chapter 13 buyout involves refinancing a current home mortgage during or after a Chapter 13 bankruptcy repayment plan.
This type of financing allows homeowners to use the equity in their home to pay off their Chapter 13 bankruptcy plan early. It's a strategic move that can help borrowers exit bankruptcy sooner than anticipated by leveraging their home's equity to clear their remaining bankruptcy obligations. This process can be facilitated through specific mortgage programs designed to accommodate borrowers in active Chapter 13 repayment plans.
Financing for properties with five or more units, such as apartment buildings, offers various loan options including bank loans, CMBS loans, and programs through Fannie Mae and Freddie Mac.
These loans are designed for investors looking to finance multifamily properties and can come with different terms and requirements based on the lender and the specific program. They are a key resource for those interested in multifamily real estate investment, providing the necessary capital to purchase or refinance these properties.
Loans for foreign nationals are tailored for non-US citizens who wish to purchase property in the United States.
These non-QM (Non-Qualified Mortgage) loans accommodate individuals who may not have a US credit history or Social Security number but are looking to invest in the US real estate market. The programs can vary widely in terms of down payment, interest rates, and documentation required, aiming to provide a home base or investment opportunity for non-residents.
ITIN (Individual Taxpayer Identification Number) mortgage programs are designed for borrowers who do not have a Social Security number but possess an ITIN, allowing them to apply for home loans.
These programs cater to residents and non-residents working in the U.S. who earn an income and file taxes using their ITIN. Eligibility for ITIN loans typically includes a minimum down payment, credit score requirements, and a history of employment and income verification.
Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a "margin" plus an "index." Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).
When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called "caps". Suppose you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.
Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.
FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single family and multifamily homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn't issue loans or set interest rates, it just guarantees against default.
FHA loans allow individuals who may not qualify for a conventional mortgage obtain a loan, especially first time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.
A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only loans are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.
You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.
Since you'll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.
As an example, if you borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time.
Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.
Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.
6-Month CD Rate
This index is the weekly average of secondary market interest rates on 6-month negotiable Certificates of Deposit. The interest rate on 6 month CD indexed ARM loans is usually adjusted every 6 months. Index changes on a weekly basis and can be volatile.
This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 1 year. This index is used on the majority of ARM loans. With the traditional one year adjustable rate mortgage loan, the interest rate is subject to change once each year. There are additional ARM loan programs available (Hybrid ARMs) for those that would like to take advantage of a low interest rate but would like a longer introductory period. The 3/1, 5/1, 7/1 and 10/1 ARM loans offer a fixed interest rate for a specified time (3,5,7,10 years) before they begin yearly adjustments. These programs will typically not have introductory rates as low as the one year ARM loan, however their rates are lower than the 30-year fixed mortgage. This index changes on a weekly basis and can be volatile.
This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 3 years. This index is used on 3/3 ARM loans. The interest rate is adjusted every 3 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. The index changes on a weekly basis and can be volatile.
This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 5 years. This index is used on 5/5 ARM loans. The interest rate is adjusted every 5 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. This index changes on a weekly basis and can be volatile.
The prime rate is the rate that banks charge their most credit-worthy customers for loans. The Prime Rate, as reported by the Federal Reserve, is the prime rate charged by the majority of large banks. When applying for a home equity loan, be sure to ask if the lender will be using its own prime rate, or the prime rate published by the Federal Reserve or the Wall Street Journal. This index usually changes in response to changes that the Federal Reserve makes to the Federal Funds and Discount Rates. Depending on economic conditions, this index can be volatile or not move for months at a time.
12 Moving Average of 1-year T-Bill
Twelve month moving average of the average monthly yield on U.S. Treasury securities (adjusted to a constant maturity of one year.). This index is sometimes used for ARM loans in lieu of the 1 year Treasury Constant Maturity (TCM) rate. Since this index is a 12 month moving average, it is less volatile than the 1 year TCM rate. This index changes on a monthly basis and is not very volatile.
Cost of Funds Index (COFI) - National
This Index is the monthly median cost of funds: interest (dividends) paid or accrued on deposits, FHLB (Federal Home Loan Bank) advances and on other borrowed money during a month as a percent of balances of deposits and borrowings at month end. The interest rate on Cost of Funds (COFI) indexed ARM loans is usually adjusted every 6 months. Index changes on a monthly basis and it not very volatile.
Cost of Funds Index (COFI) - 11th District
This index is the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada. Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good if rates are falling.
L.I.B.O.R stands for the London Interbank Offered Rate, the interest rates that banks charge each other for overseas deposits of U.S. dollars. These rates are available in 1,3,6 and 12 month terms. The index used and the source of the index will vary by lender. Common sources used are the Wall Street Journal and FannieMae. The interest rate on many LIBOR indexed ARM loans is adjusted every 6 months. This index changes on a daily/weekly basis and can be extremely volatile.
National Average Contract Mortgage Rate (NACR)
This index is the national average contract mortgage rate for the purchase of previously occupied homes by combined lenders. This index changes on a monthly basis and it not very volatile.
A graduated payment mortgage is a loan where the payment increases each year for a predetermined amount of time (such as 5 or 10 years), then becomes fixed for the remaining duration of the loan.
When interest rates are high, borrowers can use a graduated payment mortgage to increase their chances of qualifying for the loan because the initial payment is less. The downside of opting for an smaller initial payment is that the interest owed increases and the payment shortfall from the initial years of the loan is then added on to the loan, potentially leading to a situation called "negative amortization." Negative amortization occurs when the loan payment for any period is less than the interest charged over that period, resulting in an increase in the outstanding balance of the loan.
This type of loan is designed for investors seeking to purchase property without the traditional income verification processes. Unlike standard mortgages, No Doc loans require minimal documentation, not necessitating borrowers to provide income verification or employment history. Instead, lenders may accept alternative documentation, such as bank statements, to assess the borrower's ability to repay the loan.
This type of mortgage is particularly suited for investors who may have significant income but lack the conventional proof of income required by other loan types.
Alternative Income Documentation methods offer flexibility for borrowers who may not have traditional income verification forms like W-2s or consistent salary records. These methods are particularly useful for self-employed individuals, freelancers, or those with variable income.
WVOE Only: Written Verification of Employment (WVOE) is used to confirm a borrower's income directly from their employer. This method bypasses the need for traditional pay stubs by providing a formal document from the employer that verifies the employment status and income of the borrower. It's particularly useful for those who have a consistent source of income from employment but lack the standard documentation.
099 Only: For individuals who work as independent contractors or freelancers, income is often documented through 1099 forms received from clients for services rendered. Using only 1099 forms as income documentation allows lenders to assess a borrower's income based on the aggregate payment received from various sources without traditional employment verification.
P&L Only: Profit and Loss (P&L) statements document the income and expenses related to a borrower's business operations. For self-employed individuals, a P&L statement can serve as a comprehensive overview of their business's financial health over a specific period. This method allows lenders to evaluate a borrower's income based on the net profits of their business operations, offering a holistic view of financial stability without traditional income verification.
Asset Utilization mortgages allow borrowers to leverage their liquid assets as proof of income to qualify for a loan.
This type of mortgage is especially beneficial for individuals who may not have a traditional income stream but possess significant assets. By calculating the potential income generated from these assets, lenders can assess a borrower's ability to repay the mortgage.
This approach makes it possible for those with high asset values but irregular income patterns, such as retirees or entrepreneurs, to secure financing for a home purchase.
A Commercial Real Estate (CRE) Loan is designed for the acquisition, development, or upgrade of commercial properties. This includes office buildings, shopping centers, industrial warehouses, and other commercial spaces. CRE loans are typically secured by a lien on the commercial property, with terms and rates that vary based on the project's risk assessment. These loans are fundamental for businesses and investors looking to expand or start their commercial real estate ventures.
Mixed-use loans are financing options specifically designed for properties that incorporate both residential and commercial units, such as a building with retail shops on the ground floor and apartments above. These loans can be commercial, short-term, or government-backed, depending on the lender and the specific characteristics of the property.
Mixed-use loans offer flexibility for property owners and investors looking to finance buildings that serve dual purposes, combining elements of residential and commercial financing strategies.
Interest-only mortgages are a specific type of home loan where the borrower is required to pay only the interest on the principal balance for a set period at the beginning of the loan term. During this phase, the principal balance remains unchanged.
This option can lower monthly payments in the short term but will require higher payments later on when the borrower starts to pay off the principal amount as well. It's a strategy that can be advantageous for borrowers with fluctuating incomes or those who plan to sell the property before the interest-only period ends.
Obtaining a mortgage one year out of bankruptcy refers to the eligibility to apply for certain types of home loans relatively soon after being discharged from bankruptcy, particularly Chapter 13.
While traditional mortgage options like conventional, FHA, VA, or USDA loans typically require a waiting period of one to four years post-bankruptcy, some loan programs may allow borrowers to qualify for a mortgage as early as one year after bankruptcy, depending on the circumstances of the bankruptcy and the borrower's financial recovery.
Manual underwriting involves a more hands-on review process for government-backed loans, such as FHA, VA, or USDA loans, when borrowers do not meet the standard automated underwriting criteria.
This process allows underwriters to take a closer look at the borrower's financial situation, including credit history, employment, income, and debts, to make a more informed lending decision. It's particularly beneficial for borrowers with unique financial profiles or those recovering from financial hardships.