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Home Loan Programs

Below you will find a comprehensive list of the different loan programs available in the market and the advantages and disadvantages of each. In addition we outline various home loan features many consumers choose to take advantage of. To discuss a specific mortgage program with a professional finance broker in detail contact us now: 831.325.6959. QUALIFY ME

30 Year Amortized Fixed Rate Mortgage:
The traditional 30 year fixed rate mortgage is the most common loan program on the market. Because the interest rate is fixed for the life of the loan, the monthly payment associated with this type of loan does not change. This fixed payment feature makes 30 year fixed home loans among the most popular vehicle for home loan finance. The true advantage of this program is the security it offers. Knowing your monthly mortgage payment will remain a constant figure provides true peace of mind. In addition some consider the 30 year term itself to be an advantage as well. In typical economic markets inflation is steady which makes each dollar worth less, which consequently leads to higher payrolls and more expensive products necessary to our daily lives. Therefore deep into the term of a thirty year fixed, after experiencing typical inflation, your fixed payment is going to seem like it is significantly less because the value of the dollar is worth less than it was when you established the loan and consequently you are now collecting more dollars to live your daily life. The disadvantages of 30 year fixed programs include the inability of your rate to adjust in low rate markets, and a slightly higher rate when initially qualifying in comparison to adjusting loan programs. For these reasons assessing your long term future plans for the property when considering a 30 year fixed home loan is imperative in deciding if this is the right choice for you. QUALIFY ME 

15 Year Amortized Fixed Rate Mortgage: A 15 year fixed rate mortgage offers a fixed rate for the life of the loan, and just like the thirty year fixed people find this loan appealing because they know the monthly payment will never change throughout the loan. Usually the market offers a lower interest rate for accepting the shorter term and you pay off your home in half the time which means less interest paid for the money borrowed – both advantages. The disadvantage is a higher monthly payment which can compromise cash flow. Many borrowers opt instead for a 30 year fixed rate loan and voluntarily make larger payments that will pay their home loan off faster thereby mimicking the advantages of a fifteen year fixed.  We recommend discussing this as an option with you loan officer if you are considering a 15 year fixed home loan. QUALIFY ME

10, 20 & 40 Year Amortized Fixed Rate Mortgage: Although less common, 10, 20 and 40 year fixed rate home loans are available. As the name implies the interest rate is fixed and will not adjust so your payment will always remain the same, which is an advantage. This is the only true similarity these three different programs have between one another. Because the term lengths are different all generate different monthly payments required to fully pay off the loan in accordance with the term. Generally speaking, the longer the term the higher the interest rate and the lower the payment, but the more you will spend over the course of the loan; it is a contradictory truth. If you are interested in one of these programs it is important you work with a professional familiar to this program specific market. QUALIFY ME

Hybrid ARM (3/1 & 3/6 ARM, 5/1 & 5/6 ARM, 7/1 ARM, 10/1 ARM, etc…): Hybrid Adjustable Rate Mortgages are designed to offer consumers a fixed payment for a specified period of time – 3, 5, 7, or even 10 years – at which time the rate begins adjusting to the open market. The basic rule is the longer the fixed period, the higher the interest rate. Historically rates offered with these programs are significantly lower than fixed rate programs which make them attractive to people that have plans for their home which involve sale or refinance at a particular time, but still want the security of a fixed rate until that time comes. With the lower interest rate comes a lower payment providing more benefit than straight fixed programs. Some choose to reinvest this savings into each mortgage payment thereby reducing their principle balance each month and the subsequent interest accrued. Others reinvest this savings into college funds, retirement accounts, or pay off student or misc. debt to improve their credit rating for future endeavors. The disadvantages of this program type lie in the adjustments. This is a very intricate market with many programs inside of programs (not all 5/1 Hybrid ARMs are the same). Caps, max rate adjustments, adjustment cycles, various indexes, and the lender margin are all important factors that many fail to discuss. The hybrid ARM market definitely has its benefits but they come with risk, you must get objective information about the program specifics you are interested in from your loan consultant to weigh the personal advantages you would receive in proportion to the risks you would be taking before entering into this type of loan program. QUALIFY ME

Adjustable Rate Mortgages (1 month, 6 month, 1 year, and 2/28): A general definition of an adjustable rate mortgage is any home loan subject to a rate adjustment sometime within two years of the loan being established. Because these loans have very short fixed periods (if any at all), and are tied directly to the markets their start rates are usually much lower than fixed and hybrid home loans, but adjustments can be measureable and fast should the index you are tied to suddenly move in the wrong direction, your monthly payments can increase dramatically, on the other hand if the market moves in the right direction your monthly payment will fall. Although these loans are based on standard thirty year terms, they are generally used as short term instruments. It is highly advisable to discuss and have ready an exit plan that is realistic should you decide to take advantage of an adjustable rate mortgage program, make sure to discuss it with your mortgage professional. QUALIFY ME

Negative Amortization Loans: Negative amortization loans are home loans that provide the borrower with four payment options each month – a 15 year amortized payment, a 30 year amortized payment, an interest only payment, and a deferred interest payment. Should you choose to make the deferred interest payment because you have not paid back all of the interest that will have accrued that month, your principle balance will increase by that sum. There are various types of negative amortization loans, which include true adjustable rates and hybrids. The advantage of this program is flexible control of cash flow and open chain to equity. The risk is ability to control debt management, adjusting rate, and potential loss of equity. By in large this is a very aggressive loan program. Understanding and thoroughly evaluating this option is a very important, make sure your loan officer is willing to share with you all the details including back end yield spread. QUALIFY ME

Buy Down Mortgages: Buy-Down Mortgages allow the borrower to qualify at below market rates which allow them to qualify for a larger loan amount. In a 2/1 Buy-Down for example, the initial starting interest rate increases by one percent at the end of the first year, and increases by another one percent at the end of the second year for a two percent total planned increase over the first two years. After these planned adjustments, the interest rate becomes fixed for the remainder of the loan. In this situation usual practice is to keep the loan in place for an additional three years which brings your averaged interest rate in line with the original market conditions. This program is not very common, although available, and typical candidates are those that will be receiving a guaranteed raise in income in the near future. Discuss and choose this option carefully, often times there are alternative solutions your loan consultant can suggest to avoid the higher payments that inevitably come with this program. QUALIFY ME

Jumbo and Super Jumbo Home Loans: Jumbo and Super Jumbo home loans do not have the secondary market backing as their conforming and jumbo conforming counter parts, and depend on their financing from alternative sources which makes identifying an experienced jumbo and super jumbo loan brokerage to work with is all the more imperative. The loan programs offered in this particular market require a larger equity position for qualifying and have slightly higher interest rates. Fixed rate mortgages, hybrid ARMs, and adjustable rate mortgages are all available, most product pricing lead the consumer to hybrid adjustable rate mortgages due to the high rates associated with fixed programs.

Expect stricter qualifying standards if you are applying for a jumbo or super jumbo home loan, which include specific appraisal requirements and collateral review. Prepayment penalties are also common in this market although they can be avoided and/or bought out depending on the situation. Without an experienced loan consultant on your side this market can be unforgiving. QUALIFY ME

Second Mortgages: Second mortgages as the name suggests is a second home loan, however the name implies something much more important that this simple fact, it also informs us of the lien position of the mortgage. Lien position has to do with how quickly the lender will be paid back in the case of default.  The higher the lien position the more risk to the lender. There are two general types of second mortgages fixed seconds and Home Equity Lines of Credit. QUALIFY ME

Fixed Second Mortgages: Fixed second mortgages have a fixed interest rate associated with the loan, and are popular when someone does not want to refinance their first home loan but would like to tap into their equity. In addition fixed seconds have been popular in the past as a means of avoiding having to pay private mortgage insurance or lender paid mortgage insurance. The disadvantage to this program is higher interest rates than first mortgages, and the balloon payment feature which is common on some fixed seconds. The market for second mortgages can be limited, and terms unforgiving if this type of financing is not secured correctly. QUALIFY ME

Home Equity Line Of Credit (HELOC): Home Equity Lines of Credit also known by their acronym HELOCs work very similarly to credit cards, with one major difference, the money borrowed against a Home Equity Line of Credit is secured by collateral – your home. Because of the collateral position they offer significantly better rates than credit cards which make them an attractive loan for people looking for cash, either now or in the future. At closing you are specified a credit limit which you can borrow up to during the draw period. The draw period is typically 10 years however draw terms can vary from 5 to 25 years depending on the HELOC. These funds can be borrowed “on demand” and you only pay back the portion you use (plus interest). Until money is borrowed against the HELOC you will not have a monthly payment, however an annual fee to keep Home Equity Lines of Credit open is common although  minimal (50 to 100 dollars per year). The monthly payment will depend on how much you draw out against the HELOC, but if a draw is taken you will have a minimum monthly payment due which is often interest only; beyond the minimum, it is up to you how much to pay back and when to do so. Understand that at the end of the draw period, you will have to pay back to full principle amount borrowed, either as a lump sum balloon payment, or according to the loan’s amortization schedule. An important distinction between Home Equity Lines of Credit and Fixed Seconds is that HELOCs have variable rates attached to them. There are some HELOC programs that allow you to lock in an interest rate for money already borrowed, but any money borrowed against the HELOC after the rate lock will be subject to an adjusting rate. Discuss this as an option with your loan officer as a safety feature. QUALIFY ME

Loan Features:

Many lending institutions offer features that allow you to customize these independent loan programs to meet your specific needs. We have defined these as features because they are available on most programs, however they are not required. These features, if a subject of interest, should be discussed with your loan officer in depth because of the dramatic changes they have on independent loan programs. QUALIFY ME

Interest Only: Interest only is one of the more popular loan features available. The interest only feature allows the borrower to pay back only the interest that has accrued on the loan. Once the interest only period has expired the loan becomes fully amortized based on the remaining years left on the loan. The advantage to this feature is a lower monthly payment, the disadvantage your loan balance remains the same if you always make this interest only payment. To offset this many opt to add money to their payment on occasion for the specific purpose of buying some equity; others do not believe in method. Whatever your investment strategy, whenever you are not working down your loan balance, you are taking more risk, which is why interest only loans are typically more popular in appreciating markets. It is important to understand the ramifications of what will happen to your particular loan when the interest only feature expires. On a 30 year fixed with a 10 year interest only option for example your rate will not change but if you make the interest only payment and never pay down the principle during that first ten years, when the interest only term expires and the loan re-amortizes itself, it will do so on a 20 year term which will make your monthly payments higher despite your interest rate not increasing. On Hybrid ARMs with the interest only feature this is also true, but the rate will adjust as well. Interest only is more complex than most are willing to admit. QUALIFY ME

Bi-weekly payment: Bi-weekly payment refers to how often you make a payment towards your loan. On a typical 30 year loan you are required to make, and your payment is calculated off of, 360 payments, or 30 years. With 52 weeks in the year, bi-weekly payments will mean 26 payments instead of the traditional 12. These payments are half the amount of the typical monthly payment that would be associated with the same loan, the difference is you will inadvertently make an addition payment each year on your home loan, and doing so will reduce the term of the loan significantly. This is a popular feature; however it is important that you work with a lender that will apply your payment immediately as opposed to monthly. Immediate application means the principle balance will be paid down faster because the subsequent payment will have less interest accrued because the principle balance was lower because of the last payment. If made accrued monthly this will not happen as quickly, but you will still successfully reduce the principle balance. Either way this feature will reduce the term of your loan; identifying which lenders accrue on biweekly schedules as opposed to monthly schedules is something a specialist can help you with. QUALIFY ME

Balloon Payment: A balloon payment occurs when at the end of the loan you still have a balance and are required to pay it off in a lump sum. This is relatively uncommon on first loans, but is seen frequently on fixed seconds. A 30/15 for example is a loan amortized over 30 years but due in fifteen. This feature helps minimize your monthly payment, but requires an exit strategy. Make sure you know the exact amount that will be required of you should this balloon payment become due. QUALIFY ME

Prepayment Penalties: There are two different types of prepayment penalties, hard and soft. A prepayment penalty refers to a set period of time in which you are penalized for early prepayment. If your prepayment penalty is soft, you can sell your home during this period at no penalty but you cannot refinance. If your prepayment penalty is hard, you will be required to pay the penalty in the case of sale or refinance. The penalty is usually six months of accrued interest; however this can vary depending on the loan program and terms. The benefit of accepting prepayment penalties is usually a lower interest rate which means a lower monthly payment. In the case of a new home purchase, accepting a two year prepayment penalty if you have an attractive rate and program can make sense because it shadows capital gains law. QUALIFY ME

Private Mortgage Insurance: Should you decide to take out one loan valued over 80% of your equity, private mortgage insurance is one option for keeping the interest rate low and overall terms of the loan agreeable. Private mortgage insurance refers to insurance taken out guaranteeing the repayment of the loan should you default. There are various ways to contract private mortgage insurance, but the most common is monthly. In this situation you are required to pay a monthly fee for the mortgage insurance to continue, this fee is added to your mortgage payment. The advantage to private mortgage insurance is once you can prove a stronger equity position (what that position is depends on insurer) you can petition and have the insurance removed. In doing so you no longer have to pay the monthly dues, and your monthly payment subsequently goes down. Private mortgage insurance rates vary so it is important to speak to a professional familiar with this market. QUALIFY ME

Lender Paid Mortgage Insurance: Lender paid mortgage insurance is another option should you decide to take out one loan valued over 80% of your equity. What this typically translates to is a slightly higher interest rate and the lender paying the monthly mortgage insurance. The real advantage is no monthly mortgage insurance premium is due; the disadvantage is you are accepting a higher interest rate, and you cannot petition later to have LPMI removed like private mortgage insurance. Depending on your credit grade, lender paid mortgage insurance is typically has a slightly lower overall payment than private insurance programs, however if you are able to remove private mortgage insurance quickly or plan on staying in the home of a substantial period of time, private mortgage insurance will turn out more cost effective. Weigh these options before making your decision. QUALIFY ME

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email@culturemortgage.com

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