Types of Loan Programs
Here are the main types of loan programs offered in the residential mortgage industry today. There are others not shown here that are rarely offered (or selected) such as Balloon Loans and 2-1 or 3-2-1 Buydown Loans that were somewhat popular at one time. I can certainly cover anything of interest not mentioned here.
Fixed Rate Mortgage (aka FRM)
A fixed rate mortgage has a fixed term of 30, 20, 15 or 10 years and a fixed rate for the life of the loan. The payment will be fixed based on the rate, term and the loan amount. You are free to prepay the principal at any point. The loan will pay off faster when you do. The payment will remain the same. The longer the term, the lower the payment. Shorter term loans typically have lower rates than the standard 30 year term. However, the payment will be higher due to the shorter term of payback. Thousands in interest can be saved with a shorter term or by prepaying principal. The choice of term at the onset depends on qualification and preference.
Adjustable Rate Mortgage (aka ARM)
An ARM product will have an adjustable feature meaning the rate can change at a set point during the term. There are a wide variety of ARM products. Each have an initial period where the start rate is fixed and payment is fixed. This may be 1 year, 3 years, 5 years, 7 years or 10 years. The ARMs typically have a start rate that is lower than the going fixed rates. This allows people to have a lower payment and pay less interest for the initial period. This can make sense for people who know they are in a short-term situation or have flexibility with their plans.
The ARMs of today have caps so that the adjustments cannot be extreme. There will be adjustments after the initial fixed period. It is very important to understand how the program works before deciding to go with an ARM.
The full explanation of how an ARM works is best done in person or at least over the phone. Please let me know if you have interest in this type of program.
Interest Only (aka IO)
With a standard loan repayment plan, the payment consists of principal and interest every month. The principal portion of the payment is enough to reduce the loan balance every month to keep on track with full repayment by the end of the term (i.e. 30, 20, 15 or 10 years as the case may be).
An Interest Only loan requires only the minimum interest to be paid every month – thus dramatically reducing the monthly payment obligation. This IO payment option rolls along for generally ten years at which time the payment will ‘fully-amortize’ based on the rate and remaining term. There will be a significant increase in payment for someone who pays only interest for the ten years and continues on with the loan. Majority of people do not keep their IO loan for ten years or longer. They have a shorter plan with their mortgage.
If only interest is paid, the loan balance will not decrease. You have the option of paying money toward principal each month. This can be in small or large increments with no prepayment penalty.
There are many options of Loan Program and Loan Type with many nuances associated with each and the combination of each. We can map out all of your options and discuss what you are comfortable with and what makes sense for your short and long-term goals.