Mortgage Information

30-Year Fixed

The 30-YEAR FIXED-RATE MORTGAGE is still the most common mortgage in use today. It offers the lowest monthly payments of any of the common fixed-rate loans, and is therefore more affordable for many prospective homeowners. This mortgage loan is most appropriate for borrowers that plan to remain in the home for many years and wish to keep housing expenses consistent.

15-Year Fixed

The 15-YEAR FIXED-RATE MORTGAGE shortens the life of the loan to 15 years. That means you own your home in half the time. And because the loan is shorter, you’ll pay substantially less in the total interest—less than half the total interest of a 30-year mortgage. On the other hand, because you repay the loan in half the time, the monthly payments are higher than those of a 30-year mortgage. For people who can afford the higher monthly payments, this is an excellent choice, with lower total costs and a shorter term. It can allow you to own your home before your children start college or before you reach retirement.

80-20 Mortgages: No money down without PMI

As home prices continue to climb, borrowers increasingly turn to 100-percent financing, and especially home loans that sidestep the need for mortgage insurance.

One such loan is known as the 80-20 mortgage. The home buyer takes out two loans -- the first for 80 percent of the purchase price, and the second for 20 percent of the home's price. The borrower is expected to come up with the closing costs.

"It allows people to buy without a down payment, or for those people who would prefer not to touch their savings to get into a house," says Anthony Hsieh, CEO and founder of HomeLoanCenter.com.

"What we're seeing is a lot of young professionals," he adds. "People who have gotten out of college and have good jobs. They have good credit, but they haven't had the opportunity to accumulate a lot of savings."

These mortgages are targeted at people who feel stuck on the rent treadmill. They can afford monthly rent that costs roughly the same as a house payment, but after they pay their monthly bills, they can't save much money toward that down payment. Many of these people watch home prices rising faster than their incomes and feel that they're falling further behind with each month that they rent.

Plenty of mortgage programs allow borrowers to buy houses with little or no money down, but they usually require private mortgage insurance, or PMI. Mortgage insurance protects the lender from the costs of foreclosing on a house when the borrower falls too far behind on the loan payments. The lender benefits, but the borrower pays. Generally, mortgage insurance is required when the loan amount is for more than 80 percent of the home's price.

The way to avoid paying mortgage insurance is by getting a "piggyback loan" -- a second mortgage to back up the first mortgage. The first and main mortgage is for 80 percent of the home's price. The piggyback loan is for 20 percent of the home's price, minus the down payment, if any. If you see mention of an 80-15-5 loan, it means that the borrower got a main mortgage of 80 percent of a home's purchase price, a piggyback loan for 15 percent, and made a 5-percent down payment. Myriad combinations, such as 80-10-10, are possible. The 80-20 uses a piggyback loan without a down payment.

Second loan, higher rate
Except in unusual cases, the interest rate on the piggyback loan is higher than the rate on the first mortgage. But the combined payment usually costs less than a loan of greater than 80 percent of the home's value, plus mortgage insurance. This is especially true if the homeowner itemizes deductions on federal income tax, because mortgage interest is deductible but mortgage insurance is not.

"It pretty much comes out to a straightforward mathematical evaluation," says Bob Walters, divisional vice president of Quicken Loans. You merely compare the cost of an 80-20 piggyback loan with a loan that includes mortgage insurance. The piggyback loan usually costs less each month.

Lenders structure 80-20 loans in many ways. At Hsieh's HomeLoanCenter, the first mortgage generally is a 5/1 ARM -- a loan with a fixed rate for the first five years, and which adjusts annually after that. The piggyback loan is a home equity line of credit that changes with the prime rate. These loans, Hsieh says, are designed to be refinanced in three to five years.

With Countrywide Home Loans, the 20-percent piggyback is always an equity line of credit pegged to the prime rate, and the 80 percent first mortgage can be a fixed-rate, adjustable-rate or interest-only loan.

Pros and cons
The 80-20 loans have their pros and cons, says Vijay Lala, senior vice president of product development at Countrywide. "The pros are that you can get into a home with almost no money down," he says. "You just have to have your closing costs, and you can get your payment as low as possible with the interest-only feature."

The main drawback is a biggie. If the house loses value -- a possibility in overheated markets where these loans might be especially tempting -- the owner ends up owing more than the house is worth. That becomes a problem if the owner needs to sell the house or wants to refinance the loan. In such a case, the owner has to come up with cash to repay the loan in full.

An 80-20 loan isn't just for the cash-strapped borrower. Some home buyers have ample down-payment money, but the money is invested and they don't want to liquidate it.

"For relatively wealthy people, it's a cheap way of borrowing money at these low interest rates," says Diane Saatchi, who deals with plenty of wealthy clients as regional vice president of the Corcoran Group in the East Hampton, N.Y.

Bi-Weekly Mortgage
For people willing to make a half payment from each paycheck, this loan offers rapid building of equity. The biweekly mortgage is usually a 30–year fixed rate mortgage.

What’s different is that payment for half the monthly amount is made every two weeks. In this way, you make the equivalent of 13 months worth of payments every year.

Also, because your payments are applied to the loan every 14 days, the principal amount decreases faster, saving even more in interest costs. As a result, your loan term shortens to 22 or 23 years, providing a substantial decrease in total interest costs.

For example:
Monthly mortgage payment (12 months/12 payments): $997
Interest paid over the life of the loan: $209,263
Paid off in 30 years

Half payment (13 months/26 payments): $498 ($997 / 2)
Interest paid over the life of the loan: $155,938
Paid off in 22-23 years

Interest savings over the life of the loan are $53,325 – paid off in 22 -23 years instead of 30 years!

You can get a biweekly mortgage, or you can actually calculate the additional amount to pay on the principal each month on your own. If your monthly mortgage payment is $997, adding $83 a month ($997 divided by 12) toward the principal would result in the same interest savings as the biweekly mortgage. The loan would still be paid off about seven years early, but you wouldn’t have to commit to making payments every two weeks.

Adjustable-Rate Mortgages (ARMS)
Why choose an ARM?

An ARM is a good choice if you are low on cash now, and expect your income to increase over time or if rates are expected to drop. It is also a good choice if you have a high income and/or high wealth and can adjust your budget, or if you know that you will sell the home in a relatively short time period.

A convertible mortgage allows you to benefit from the advantages of an ARM with the option to make it a fixed-rate mortgage at the time of conversion.

ARMs usually start with a lower interest rate than a fixed-rate mortgage, so your monthly payments are lower. This allows you to qualify for a larger mortgage than would be possible with a fixed-rate mortgage or the same size mortgage at lower monthly payments. The interest rate on an ARM is adjusted periodically based on an index that reflects changing market interest rates. When the interest rate is adjusted, your monthly payment goes up or down. There is always a floor cap, payment cap, and life cap. It's important to understand all the aspects of ARMs before you make your decision. In a convertible ARM, you get the same advantages plus the ability to convert to a fixed-rate mortgage at a specified point in time at a specified conversion rate. However, if the interest rate is at a higher level when it’s time to convert, you may not want to do it. In that case, the loan would become a regular ARM.

Hybrid and Convertible Adjustable-Rate Mortgage
The terms hybrid and convertible tend to be used interchangeably. However, there are two different types of hybrid loans: those that begin as ARMs and convert to a fixed rate, and those that begin as a fixed rate loan and convert to an ARM.

Start as a fixed rate and convert to an ARM
This loan is fixed for a period of time, such as 2, 3, 5, 7, or 10 years, then becomes a one-year ARM (changing its rate annually) after the fixed period. You may see them advertised as, for example, a 5/1 convertible ARM.

Start as an ARM, convert to fixed rate
A convertible ARM contains a provision that will allow a borrower to convert an ARM to a fixed rate after an initial payment period. There is usually a fee to be paid when a loan converts, and the rate is slightly higher than the going rate for fixed rate loans.

Interest-only Loan
This type of loan is primarily for those who work on commission and receive big bonuses once or twice a year. "Interest only" loans mean lower monthly payments for a fixed period of time because you pay only the interest on your mortgage. Most people then choose to make big payments on the principal when bonus checks and commissions are received.

Two-Step Mortgage
A TWO-STEP MORTGAGE is a convertible ARM mortgage that offers a fixed rate for a set time and adjusts only once—usually at five or seven years. After that the interest rate is adjusted to market conditions at the time.

Balloon Mortgage
A BALLOON MORTGAGE is a special kind of fixed-rate mortgage that offers relatively low, fixed payments as though it were a standard 30-year fixed-rate mortgage. But after a few years—usually five to seven years—the mortgage term ends with a single large payment (the “balloon”) for all the remaining principal. Borrowers generally have the option to refinance their balloon mortgage to a fixed-rate loan at the end of the term. Because the term is actually quite short, the total interest paid is significantly less than a conventional mortgage, making this a good choice if you don’t plan to stay in the home you’re buying for very long (if you sell before the loan comes due, the “balloon” payment will not be a problem).

Reverse Mortgage
A reverse mortgage is designed to help people make the adjustment from an employed income to a retirement income without forcing them to disrupt their lives by moving. As required by HUD, homeowners must be over the age of 62.

While allowing homeowners to use the equity in their home as income, reverse mortgages differ from a home equity loan in two ways—there is no income requirement and there are no monthly payments. Indeed, this loan is not repaid as long as you live in the house.

Buydown Mortgage
What goes “down” in a buydown? The interest rate of your loan.

By paying a large sum of money to the lender at the time you make the loan, you can lower the interest rate. That sum is always measured as "points." A "point" is one percent of the principal amount of the mortgage, paid to the lender. (One point on a $100,000 loan would be $1,000.)

There are two types of buydowns: temporary and permanent.

A temporary buydown is an option for borrowers who expect to have a significant increase in income over the coming years. It lowers the interest rate and the monthly payments for the first few years of the loan. The most common type of temporary buydown is the “3-2-1” buydown. For example, an 8 percent loan with a 3-2-1 buydown would have a 5 percent interest rate the first year, a 6 percent interest rate the second year, a 7 percent interest rate the third year, and an 8 percent interest rate beginning the fourth year through the life of the loan. This type of buydown will generally cost three to four points – that’s $6,000 to $8,000 on a $100,000 loan.

A permanent buydown lowers the interest rate for the life of the loan. Again, this type of buydown will generally cost six to eight points and will reduce the interest rate by one percent for the life of the loan.

It is often paid by the seller or the builder as an incentive to finalize a sale by creating lower monthly payments. Be aware that the cost of those points may be included in the selling price.

FHA (Federal Housing Authority) Loans
Who, other than first-time home buyers, might want to use FHA mortgages? Any borrower who cannot or does not want to put down a large down payment or has blemishes on their credit history that may preclude them from certain uninsured programs.

VA (Department of Veterans Affairs) Loan

VA Mortgages are government-insured loans available to veterans of the armed services, those currently on active duty or in the reserves, and widows or widowers of veterans. Like FHA loans, VA loans have guidelines that allow more people to qualify. In addition, VA loans are available that require no down payments at all. There are limits on the size of VA loans, but they are large enough to cover the purchase of moderately priced homes virtually everywhere.

Factors that effect your interest rate

The amount of your loan can increase your interest rate if the amount financed exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. The conforming loan limit changes at the beginning of each year.

Shorter loans, such as 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

A larger down payment – greater than 20% - will give you the best possible rate. Down payments of 5% or less should expect to pay a higher rate as you are starting with less equity as collateral. If you've got the cash now and want to lower your payments, you can pay on your loan to lower your mortgage rate. It's a simple concept, really: In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments. Closing costs are fees paid by the lender, if you don’t want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan.

Credit quality and debt-to-income-ratio affect the terms of your loan through FICO Score. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a credit report, you will not receive the lowest available interest rate.