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