Types of Loans
There are many purchase & refinance loan programs available, including those that are specifically designed for first-time homebuyers, seasoned buyers, veterans & active duty military personnel, investors and/or buyers of bank-owned properties. Within this vast framework of programs are specific loan products which are far simpler to explain: fixed-rate loans (rate and payment are fixed for a specific time, such as 15 or 30 years) and adjustable-rate loans (rate and payment can change i.e. ‘adjust’ at a pre-determined time, with defined terms throughout the life of the loan, which can be up to 30 years).
Lastly, certain features can be built into the loan product, which includes interest-only payments or graduated payments through temporary rate buy-downs.
- How important is payment certainty?
If the security of a fixed payment is important, perhaps a fixed-rate mortgage, fully-amortizing loan is best for you.
- How important is equity buildup and/or retiring mortgage-free?
If rapid equity buildup is a factor, or you’d like to have your mortgage paid off by the time you retire, consider a shorter term loan, such as a 15-year, fixed-rate, fully-amortizing loan.
- Do you anticipate an increase in income or possibly selling your home in a short period?
If income growth is anticipated, or you anticipate selling your home within a short time period (ex: less than 7 years), then you might benefit from a lower start rate & payment available with an Adjustable Rate Mortgage (“ARM”) or a (temporary) rate buy down.
| Loan Programs |
Characteristics |
| 15 and 30 year fixed rate mortgages |
- Interest rate does not change.
- Principal and interest (P & I) does not change.
- Fixed-rate mortgages fully amortize over a defined period of time and are paid in-full at the end of the loan term.
- Different loan terms are available (15- and 30-year terms are most popular).
- The shorter the term, the faster equity is built and the loan is paid off.
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| Fixed rate with temporary buy down |
- Borrowers or the seller may pay to temporarily “buy down,” or lower, the interest rate.
- Decreased interest rate reduces the monthly payment.
- Lower interest rate may help borrowers qualify more easily; qualifying factors may vary.
- The rate & payment is reduced for 1, 2 or 3 years
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| Interest only mortgages |
- There are no reductions to the loan balance, unless you elect to prepay principal (not required during the interest-only period).
- There is no provision for negative amortization (the loan balance will NOT increase).
- Generally, interest-only payments are limited to the first 5, 7 or 10 years of the loan. Payments will automatically increase when the interest-only period ends, in order to amortize the loan for the remaining term.
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| Adjustable rate mortgages (ARMs) |
- There is potential for the interest rate/ payment to fluctuate.
- ARMs transfer to borrowers a portion of the risk associated with a changing economy.
- In exchange for sharing the risk, ARMs offer borrowers initial interest rates (and payments) that are lower than fixed-rate mortgages.
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| Home equity credit lines (HECLs) |
- Typically obtained as a second mortgage against real estate already owned, Home Equity Credit Lines (“HECL”s) can also be used to purchase real estate.
- Rates change monthly, typically based on the Wall Street Journal Prime Rate + a “margin”.
- Much like an “ARM”, there is potential for the rate and payment to fluctuate, albeit with greater frequency (monthly) vs. following a longer period of time (5, 7 or 10 years as with “ARM”s).
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| Reverse Mortgages |
- Just as the name implies, this is a unique loan program for borrowers aged 62 and older which behaves in a “reverse” manner from traditional mortgages: there is no repayment schedule! The lender grants credit on the basis of age and equity, and not on the basis of income or credit. The subject property must be a principal residence and occupied by the borrower as same. Instead of making monthly payments, you can also choose to receive them. That’s the “reverse” part of a reverse mortgage. Instead of turning your income into equity, you turn your equity into readily accessible funds. There are no prepayment penalties on Reverse Mortgages. The loan must be repaid in full if the borrower sells or vacates the property. The maximum loan amount available is determined by reverse mortgage calculators, factoring in age and equity, and will vary with individual circumstances.
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