Programs

Description

Advantages

Disadvantages

Fixed Rate Mortgages:

30 year fixed
20 year fixed
15 year fixed
10 year fixed 

• Interest is fixed for an amount of time; e.g., 10,15,20, 30, or even 40 or 50 years, at which point the amortized principal is paid in full.

• Monthly payments are fixed over the life of the loan
• Interest rate does not change
• Protected if rates go up
• Can refinance if rates go down

• Higher interest rate
• Higher mortgage payments
• Rate does not drop if interest rates improve

Adjustable Rate Mortgages:

10/1 ARM, 7/1 ARM
3/1 ARM, 1 year ARM
6 month ARM, 1 month ARM

• The interest rate fluctuates with an indexed rate plus a set margin; adjustment intervals are predetermined. Minimum and maximum rate caps limit the size of the adjustment.

• Lower initial monthly payment
• Lower payment over a shorter period of time
• Rates and payments may go down if rates improve
• May qualify for higher loan amounts

• More risk
• Payments may change over time
• Potential for high payments if rates go up

Flexible Payment Option ARM

a.k.a. MTA Loans

• The borrower chooses from an assortment of payment methods every month. There is a "change cap" limiting how much payments can vary in a year.

• Choose from 4 different payment options
• Lower payment over a shorter period of time
• Rates and payments may go down if rates improve
• May qualify for higher loan amounts

• More risk
• Payments will fluctuate
• Potential for high payments if rates go up
• Principal balance will increase if you don’t at least make the Interest Only Payment

Interest-Only

• For a period of time, you pay only interest, and do not pay down the principal.

• Pay the Interest part of the loan resulting in lower payments

• Principal is not being paid down
• Only for a set period of time – payments will then increase

Stated Income Programs

• Borrower(s) state their income.  Employment is verified.

• Don't need to verify income
• Faster approval
• Less documentation

• Higher rates
• May require a higher down payment

Home Equity Line of Credit

• Line of credit that is guaranteed by your house.

• You only borrow what you need
• Pay interest only on what you borrow
• Flexible access to funds
• Interest may be tax deductible
• Based on the value of your home

• Rates can change. The maximum interest rate is normally high
• Payments can change
• Harder to refinance your first mortgage
• Based on the value of your home

Home Equity Fixed Loan

• Loan that is guaranteed by your house.

• Fixed payments
• Interest may be tax deductible
• Based on the value of your home

• Higher interest rates than on 1st mortgages
• Harder to refinance your first mortgage
• Based on the value of your home

Balloon Mortgages:

5 year
7 year

• The rate is fixed for a period of time, but the principal is not completely amortized during the period. The entire balance of the principal is due as a balloon payment at the end of that period.

• Lower initial monthly payment
• Lower payment over a shorter period of time
• Many balloon mortgages offer the option to convert to a new loan after the initial term.

• Risk of rates being higher at the end of the initial fixed period
• Risk of foreclosure if you cannot make balloon payment or if you cannot refinance or if you cannot exercise the conversion option

Imperfect Credit Programs

• Programs available to those with credit problems.

• Potential for reestablishing credit if you pay your mortgage on time.
• When used for debt consolidation, you may be able to reduce your monthly debt payment

• Higher rates
• Terms may not be as favorable
• Harder to get long term fixed loans
• Loans may have prepayment penalties

First Time Buyer Programs

• Special programs designed for first time home buyers.

• Lower down payment
• Easier to qualify
• Sometimes you may get lower rates

• May be subject to income and property value limitations
• Some programs which have government subsidies may have a recapture tax if you sell the house too early.

Federal Housing Administration Loans (FHA)

• Government-subsidized loan with low down payment (e.g., as little as 1-3%) and closing fees included; the government guarantees the loan.

• Low rates for those who can't come up with the down payment or have less-than-perfect credit;
• Great for first-time homebuyers.
• The loan is assumable.

• Rates could be higher than conventional loans

Veteran Administration Loans

• A zero-down loan offered to veterans only, the VA guarantees the loan for lenders.

• Nothing down
• No mortgage insurance.
• The loan is assumable.

• Rates could be higher than conventional loans