The Loan Products
With a fixed rate mortgage, you know exactly what your principal and interest payment will be each month for
the life of your loan. It won’t change because your interest rate doesn’t change. Your taxes and
insurance component of your payment towards escrow can change (and probably will) if your taxes and insurance
change. Unfortunately, there’s no way to lock those in. If interest rates go up, you’re
protected with a fixed rate mortgage. But, you won’t benefit if rates go down. You can always
take advantage of falling rates by refinancing.
Fixed rate mortgages might be right for you if:
- Want the security of a fixed principal and interest payment.
- Think that interest rates will go up.
- Are on a fixed or limited budget.
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Compared to fixed rate mortgages, Adjustable Rate Mortgages (ARMs) offer a lower interest rate to start,
so your monthly payments are generally lower. But, the interest rate moves up and down with the market based on
an "index". Some of the more common indices include U. S. Treasury Bills, Cost of Funds Index (COFI) and
the London Interbank Offered Rate (LIBOR). Most ARMs have an initial fixed rate period where the interest
rate doesn’t change followed by the rest of the loan’s lifetime period where the rate is adjusted at
predetermined intervals. Many ARMs have caps that limit how much your interest rate can change per period as well
as for the life of the loan.
Also be aware that there are some very low rates ARMs that start out with "discounted" rates.
These discounted rates are below the market rate and will definitely go up at the first adjustment period.
Adjustable rate mortgages might be right for you if:
- You want more property than you can qualify for now with a fixed rate.
- You are confident your income will increase or rates will not go up much.
- You plan on selling or refinancing within seven years of buying your home.
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Jumbo Mortgages or nonconforming loans exceed the loan limits set by the two publicly chartered corporations
(Fannie Mae and Freddie Mac) that buy mortgage loans from lenders. The 2005 single family loan limit is $359,650.
If you need to borrow more than that amount, you need a jumbo mortgage. These jumbo mortgages typically have a
higher interest rate than conforming mortgages.
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Construction loans are used to finance the building of a new home rather than purchase an existing home. They
are usually variable-rate loans that have interest only payments during the construction phase. Draws are
scheduled based on the stages of construction to pay the builders.
Many construction loans are construction-to-permanent which means that when construction is complete, the loan
is converted to a normal mortgage. This has the advantage of a single loan with one closing.
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