TYPES OF LOANS

Essentially, there are 3 types of loans; Fixed Rate, Adjustable Rate and a mixture of both. Your long term goals are important in deciding which loan to go for. How long to you plan to hold on to your home? Is your income likely to go up or down? Do you have a large cash down payment?

FIXED RATE VS. ADJUSTABLE RATE MORTGAGES / OTHER LOANS

Fixed rate mortgages include a monthly payment (including interest and part of the loan balance) which stays the same over the complete period of the loan. You can choose between a 15 or 30 year loan. Payments will be larger on the shorter term loan, which may make it more difficult to qualify for. Payments are predictable and extra payments can reduce the cost of the loan.

However these loans can be harder to qualify for and may have higher interest rates. May not be the best choice for frequent movers.

Adjustable rate mortgages (ARMs) usually have lower starting rates than fixed rate loans, which may allow you to qualify for a larger loan amount and perhaps a larger home.The interest rates will change according to one of several indexes. Some indexes respond more slowly than others. Any ARM should have a lifetime cap, and adjustment caps built in. After the initial fixed rate period, the payments may become unpredictable and Negative Amortization may result. These loans can be great for short term owners, as they often have an initial 'teaser rate', which reduces the initial cost of the loan to you, but the rate will increase later.

It's wise to match the loan term to the length of time you plan to be in your home. If you don't know how long you plan to be in the home, ask yourself how much risk you can accept. Are you comfortable with the risk of being locked into the adjustable rate, in case of a period of higher interest rates? How much higher will the fixed rate payment be, if the adjustable rate reaches its lifetime cap?

An adjustable rate mortgage allows you to qualify at a lower interest rate than the prevailing fixed rate.

Hybrid Loans-Fixed and Adjustable
Some loans called "hybrid loans" are fixed for a period of years (maybe 3, 5, 7 or 10) then become adjustable rate mortgage. Some have a balloon payment. These hybrids may save you money during the fixed rate period, but may not save you money if you stay in the property for longer than you now plan. The payments may become unpredictable and Negative Amortization may result.

Quick Qualifier Loans
Quick Qualifier Loans require less paperwork since the lender does not verify your income. Instead, you state your gross monthly income on the loan application. These are usually restricted to self-employed borrowers. If your financial situation is complicated by partners or more than one business, these loans can facilitate quicker approval. These are also helpful if there have been periods of low income in the past few years, though they may require a larger down payment. Another potential pitfall is that a lender has the right to refer a borrower in default to the district attorney for loan fraud if they feel you have exaggerated your gross monthly income.

"No-doc" Loans
No-doc loans require a larger down payment than most other loans but are much simpler in terms of paperwork. These loans are designed for borrowers who have little or no income but a large down payment, or a substantial equity. They usually require good credit, and are helpful for retired borrowers, foreign nationals, and individuals who have inherited money or received financial settlements.

Refinancing
Refinancing can save you money when done thoughtfully. Stable, relatively low interest rates are drawing a lot of refinances into the market. If it costs you nothing to refinance, you may wish to consider it even if rates have dropped only marginally. You may consider refinancing if you plan to move into a no-cost adjustable rate loan which might cut your payments. You might refinance if you wish to take some money out of your property. While some wait for interest rates to drop to the bottom level, you should consider refinancing whenever you can save money, even if it means refinancing again later if rates continue to go lower.

AMORTIZATION / PREPAYMENT PENALTIES

Amortization describes the gradual decrease in principal balance as you repay your loan over time.

Negative amortization provides an option of making a lower monthly payment than the actual amortized payment. The difference between the lower payment and the normally amortized payment is added to your principal balance.

If you have a 30-year loan, for example, with a payment of $700 per month, with the interest portion of which is $600 per month, but because of the teaser rate (a negative amortization rate) you are paying only $500 per month, then every month $100 will be added to your loan balance. The smaller payment can give you flexibility if you loose a job, go back to school, etc. Negative amortization loans are most advisable in appreciating housing markets. Once your loan balance reaches 110% of the original amount, your negative amortization option ceases and your minimum payment would increase suddenly and dramatically. In a nut shell, negative amortization means additional interest above your capped monthly payment, is added to your loan balance.

Prepayment Penalty
Loans which include prepayment penalties generally have no points and no fees and are advisable if you plan not to be moving in the first 3 years of your loan. There are also several prepayment provisions in case you pay off the loan. The penalty you pay is only for 80% of the original loan balance. Another provision calls for a 2% penalty during the first 3 years of the loan. Another calls for a 3% prepayment penalty the first year, 2% for the second and 1% for the third, also based on 80% of the original loan balance.