Loan Program Descriptions

All of the following loan programs do NOT contain any pre-payment penalties, negative amortization, balloon provisions, nor are assumable.  These descriptions pertain to “prime,” conventional mortgages.

FIXED RATE MORTGAGES

• 30-year fixed: This is the most popular loan by far. The loan amortizes over 30 years.  While the total principal (“P”) & interest (“I”) components of your payment will never change each month until the loan is paid off, the proportion of P & I will change with each and every payment.  For instance, on payment #1, ~ 99% of the P&I constitutes interest, and on payment #360, ~ 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 25-year fixed pricing is identical to the 30-year.  The 20-year fixed pricing is typically a bit better than the 30-year, albeit the relative “spread” between the two can vary.  Because the pricing incentive is usually small or insignificant, you can easily accomplish the same objective through regular or intermittent voluntary prepayments.

The objective of prepaying (adding extra to your required monthly payment) is to reduce the balance faster, thus paying less interest, in total, in the longer run when the mortgage is paid off.  To illustrate and/or play through various scenarios, please consult an amortization schedule.

– This type of loan is recommended if you plan on remaining in the property 10+ years, and/or you believe, in future, there exists an increasing or neutral interest rate environment.

• 30-year fixed, First-Time Homebuyer Program: This loan program, sponsored by FannieMae, is designed to facilitate homeownership by permitting a lower down payment and providing more lenient underwriting rules, and providing lower interest rates and mortgage insurance costs.

– Qualification Criteria: 1) At least 1-borrower must be a first-time homebuyer or not have owned real estate within the past 3 years.  2) Property must be owner-occupied and 1-unit.  3) “Qualifiable” income doesn’t exceed 80% of the Area Median Income  -- $75,600 for many areas in the Philadelphia suburbs, but click here to determine the exact figure based upon the property location.

• 15-year fixed: 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.

– This type of loan is popular for those interested in refinancing and those whose primary objective is to payoff the loan as soon as possible, thus saving a significant amount of interest over the life of the loan.  For purchasers, this type of loan is recommended if you are planning to remain in the property 10+ years, and you will be comfortable handling the ~ 30% higher payment (vs. the 30-year fixed option).

ADJUSTABLE RATE MORTGAGES (ARM)

To best understand ARMs, it’s first best to understand some definitions regarding the adjustable dynamics and restrictions.

– Index: This is the benchmark interest rate, which then determines the rate your loan moves to.  Typical indices are the 1-year Treasury Bill, COFI (Cost of Funds Index), LIBOR (London Inter-Bank Offer Rate) – now retired, and the new Secured Overnight Financing Rate (SOFR).

– Margin: This the investor’s “profit,” which is added to the index, rounded to the nearest 1/8th% (0.125) to determine the rate your loan moves to.

– Caps: The cap is the maximum rate increase that can occur each adjustment period and the maximum your rate can increase over the life of the loan.  Example: It’s typically depicted such as “2/5,” meaning your rate cannot exceed 2% above your previous rate per adjustment period and your rate cannot exceed 5% above your start rate over the life of the loan.

Adjustment to Rate: Your new rate, per adjustment, will be the lower of the Index + Margin OR the Cap.  Feel free to call our office if you have any questions.

• 10/1 year ARM: This 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.”  Call our office for the current index, margin, and caps.  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 minimal interest rate incentive versus the 30-year fixed price.

– This loan program is recommended if you feel that you will own the property for 6-11 years.

• 7/1, 5/1, & 3/1 year ARMs: These loan programs work exactly as described by the 10/1 ARM, except the first adjustment comes at the end of 7, 5, or 3 years. With each declining initial adjustment term, the pricing typically improves a bit.

– These loan programs are recommended if you feel that you will own the property before the initial adjustment takes place, or soon thereafter, and/or are relocating, or believe interest rates will be declining in the future.

• 1 year ARM: This loan program offers one of the lowest initial interest rates on the market.  It is also one of the riskiest due to the fact that the interest rate, and thus the payment, adjusts each and every year until the loan is paid off.  Just as with the other adjustable rate mortgages listed above, the adjusted rate is subject to an “index + margin” and “caps,” so there are protections as to the maximum interest rate and payment.

– This loan is recommended in very particular circumstances such as a very temporary relocation client, a client who feels interest rates are going to be dramatically reduced, or investor purchasers who have a particular cash-flow motivation.

Feel free to call our office for a more in-depth discussion about the various loan programs or other loan programs you may have seen or heard about.