Loan programs that fit your life
With all the loan products available, Guaranteed Rate understands it’s hard to know if you should focus on the most aggressive product offering, the best rate or the security of a fixed rate. When shopping for a loan product, it’s best to look at these products as financial tools. A good way to start is by asking yourself questions:
- Is this my forever home?
- Do I have enough space to grow?
- Am I in the ideal school district?
- Will I rent or sell the home when I am ready to move?
Be realistic when answering these questions; these are your financial goals.
To gain a better understanding of how you can best use these products let’s take a look at amortization and the different types of products.
According to our resident expert, Joe Phalen, Divisional Sales Manager with Guaranteed Rate, “When deciding on a loan product you’ll need to consider your timing. Will your kids be in kindergarten or college soon and you’ll need to move in 5 years? If so, an adjustable rate might make sense. On the other hand, if you’ve found a house you can grow into, a fixed product would be more suitable.”
Take a look at how these mortgage products work, then make an educated decision with your mortgage professional.
Fixed rate mortgages are those in which the rate is fixed for the term of the loan. There are many options with regard to fixed rates such as 10, 15, 20, 25 or 30 years (the most common being 15 and 30 years). The payments for fixed rate loans are equally spread over the life of the loan. For example, a 10 year fixed rate loan is amortized over 10 years or 120 months. The loan will be paid in full by the end of the term of the loan.
Amortization describes the length of the repayment period of any loan. For example, with a 30-year mortgage the payments are divided into 360 payments (360 months equals 30 years).
Adjustable Rate Mortgages
When used properly, Adjustable Rate Mortgages are good financial tools. Before deciding on an ARM product, it’s prudent you understand how ARM rates move.
Once the rate reaches the end of its initial fixed term, the rate will be driven by the indice (LIBOR) plus the margin (profit) the bank charges. For example, today the LIBOR is .77% plus the margin of 2.25% equals a rate of 3.02%.
Once your fixed period expires, your rate will begin to adjust; in an effort to keep the rate from climbing too high, the lender offers rate adjustment Caps.
Caps offered are either 2/2/6 or 5/2/5 – let’s look at 2/2/6:
- The rate can’t adjust more than 2% the first adjustment.
- The rate can’t adjust more than 2% at each adjustment period.
- The rate can’t exceed 6% over the life of the loan.
Not all lenders will offer interest only products. Be sure and talk with your mortgage professional about the most suitable products for your financial goals.
30 Year Fixed
The 30 year fixed interest only mortgage is typically fixed for either five or ten years then becomes fully amortizing, which means you begin to pay principle and interest. Keep in mind, if you begin paying principal and interest after ten years of interest only payments, your loan will then be amortized over twenty years.
Interest only ARMs can remain interest only for up to ten years after the first ARM adjustment. The number of interest only months varies so be sure and talk with your mortgage professional regarding adjustment details.
Remember, mortgages are financial tools not bragging rights. If you focus on the rate alone, you may not put yourself on the best financial track to meet your own financial objectives. So, whether you’re preparing for a family, considering the best school districts or mapping out a future in real estate investing get clear on your ultimate goals.
Continue to visit Guaranteed Rate for more educational, jargon-free mortgage-related topics.
Continue Your Guaranteed Rate Education