| Home loan plans fall into
three simple categories: fixed-rate loans, adjustable-rate mortgages, and hybrid loans,
which have features of fixed-rate loans and ARMs. Fixed-rate mortgages have interest
rates that don't change during the life of the loan. The interest rate on an
adjustable-rate mortgage (ARM for short) adjusts every six to 12 months, or every month,
depending on the terms of the loan. When interest rates fall, the ARM interest rate
usually falls, but the opposite is true when interest rates increase.
Adjustable-rate mortgages are tied to an index which is a measure of the lender's cost
of borrowing money. As the index rises, so will the interest rate on the adjustable loan.
Common indexes include Treasury Securities (T-Bills), Certificates of Deposit (CDs), and
Libor (London inter-bank offering rate). Most metropolitan newspapers publish current ARM
index rates.
The interest rate and payment adjustments may or may not be scheduled to change at the
same time. For example, the interest rate on some plans changes more frequently than the
monthly payment, which may result in negative amortization. This means that the additional
interest will be added to the principal balance of the loan and may accrue additional
interest itself. If the monthly payments on an ARM is increasing, generally this is
because the index is rising or it is a negative amortization ARM.
Introductory rates on ARMs are usually two or three percentage points lower than the
fixed-rate. Because initial expenses will be lower with an ARM, a lender is more likely to
lend you more money than with a fixed-rate loan.
Hybrid loans start with a fixed rate that's guaranteed for an established period,
usually one to five years. After that period, the loan becomes an ARM.
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15, 30, & 40 year loans
The difference in payments and overall
savings between a 15-year fixed-rate loan and a 30-year fixed-rate loan depends on the
interest rate and the loan amount. Using a $100,000 loan and 7.25% interest rate as an
example, monthly payments on the 15-year note would be $912.86. Monthly payments on a
$100,000 loan at 7.25% fixed for 30 years would be $682.18.
The 15-year note offers the opportunity to save considerable money over the life of the
loan, since the period of amortization is half that of the 30-year note. This means that
the total interest paid on a 15-year note as compared to a 30-year note is significantly
less. Calculating the overall savings of the 15-year note over the 30-year note depends on
several individual circumstances, such as the borrower's changing income status.
40-year mortgages
Smaller monthly payments are the primary
advantage of adding 10 years to the traditional 30-year mortgage, but real estate experts
say the shorter-term loan usually is more beneficial for the home buyer. The drawback
becomes apparent simply by calculating the cost of additional interest payments, which can
total thousands for a few dollars difference in mortgage payments.
Bi-weekly payments
Some people set on paying off their home loan early and reducing interest charges opt
for a biweekly mortgage. Monthly payments are divided in half, payable every two weeks.
Because there are 52 weeks in a year, the program results in 26 half-payments, or the
equivalent of 13 monthly payments per year instead of 12. Using the biweekly payment
system, a homeowner with a $70,000, 30-year biweekly mortgage at 10 percent interest could
save $60,000 in interest and pay off the balance in less than 21 years.
FHA, VA, Fannie Mae, and Freddie Mac loans
There are programs available to help people purchase a home with less than 20 percent
down. These include FHA (Federal Housing Administration) loans, VA (U.S. Department of
Veterans Affairs) loans, Fannie Mae and Freddie Mac loans, and conventional low down
payment mortgages.
For information on FHA loans, see the U.S. Department of Housing and Urban
Development's web site at http://www.hud.gov .
For information on VA loans, see http://www.va.gov .
Fannie Mae (Federal National Mortgage Association) is a congressionally chartered
secondary-mortgage market company that buys loans from private lenders. For information on
Fannie Mae loans, see http://www.fanniemae.com .
Freddie Mac (Federal Home Loan Mortgage Corporation) purchases mortgage loans from
savings and loans, mostly. For information on Freddie Mac loans, see http://www.freddiemac.com .
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Points
Points are prepaid interest charges paid to the lender at the time of closing. One
point is equal to 1 percent of the total loan amount. The more points you pay, the lower
your interest rate will be.
Other lender fees
Lenders usually charge $200 to $300 for application or processing fees. Some lenders
don't charge the fee; some return it if you take the loan.
Credit reports cost $30 to $50 to obtain a copy for the lender.
Appraisals are necessary to assure the lender that the property is worth approximately
the price you agreed to pay. An appraisal of an average house costs a few hundred dollars.
Do builders give financing?
Builders often include financing programs to help move more buyers into a project early
on. If it's a buyer's market in your area, you can be sure that developers will offer
incentives such as low down payment financing.
When is the best time to refinance?
The traditional answer to that question is when interest rates fall 2 percent below
your current mortgage interest rate. However, in recent years some experts have argued
that refinancing may be appropriate with a smaller point spread. Some weight is often
given to the length of time the owner anticipates holding on to the property. If the owner
expects to keep the property for at least three or four years, then refinancing may be
worthwhile. While refinancing can involve upfront costs, in many cases it is possible to
roll the costs of the refinancing into the new note and still reduce the amount of the
monthly payment. |