Fixed Rate Loan Programs
Fixed rate loans are the classic, and still dominant, mortgage product. With a fixed rate loan, your customers' interest rate and payment remain unchanged for the life of their loan, no matter what happens in the economy. That's why fixed rate programs remain the most popular.
This stability does come at a price. Rates are typically higher on fixed rate loans than on other loan types, and to take advantage of future declines in interest rates, your customers will have to incur the cost and hassle of obtaining a new loan, including re-qualifying.
In addition to the popular 30 year loan, fixed rate loans are also available for shorter terms, offering the opportunity for substantial interest savings.
Adjustable Rate Mortgages (ARMs) Loan Programs
The interest rate on an adjustable rate loan is adjusted from time to time to keep it in line with changing market rates. If market interest rates go up or down, your customers' rate is adjusted accordingly to reflect changes in the economy. Adjustable rate loans can make good sense for many borrowers. By sharing the risk of interest rate fluctuations, lenders can generally make these loans at rates that are lower than those available for fixed rate loans. With a lower initial rate, your customers may be able to qualify for a larger loan and a bigger house.
Here's how they work:
Start Rate:
The "start rate" on your customers' loan is the rate they pay when their loan begins. On some loans, the start rate is set lower - which means your customers' payments can be much lower at the beginning. This may help them qualify for a larger loan.
Adjustments:
Your customers' rate is then adjusted periodically based on a market index. To the index is added a margin (a set percentage, usually between 2.5% and 5.0%). The index, plus the margin, subject to rate caps (more about this in a minute) is your customers' new adjusted rate.
Here’s an example:
| Index: |
5.5% |
| Margin: |
+2.5% |
| Your customers' new rate: |
8.0% |
To provide protection against rapidly rising rates, all of our adjustable loan programs incorporate a maximum rate, or lifetime cap. Your customers' rate will never exceed the lifetime cap, no matter how high the index goes. Many of our adjustable loan programs have an additional limit on the amount your customers' rate can increase or decrease at each adjustment, known as a periodic rate cap. Still other programs limit the amount your customers' payment can increase at each adjustment, known as a periodic payment cap. All of the caps are designed to limit your customers' risk.
Benefits of Adjustable Rate Loans
- Lower initial interest rate - often 2-3% lower than a fixed rate loan.
- Easier qualifying - your customers can generally qualify for a larger loan than with a fixed rate program.
- Short time horizon - if your customers plan to stay in their home only a short time, the interest rate and payment on an adjustable may be lower than a fixed rate loan.
- Increasing Income - if your customers' income is likely to increase over the next few years, or if your customers expect rates to fall, an ARM loan may be their best choice.
Balloon Programs
Balloon loans are a special category of fixed rate loans which offer lower interest rates in exchange for shorter term financing, usually five or seven years. At the end of this term, they require repayment of the outstanding balance with a lump-sum payment, which typically necessitates a refinance.
If your customers know they will be selling or refinancing their home in just a few years, a balloon loan may be just the loan for them. The interest rate on these loans is lower than the rate on a conventional 30 year fixed rate mortgage, though it is still fixed (as are the payments) for the balloon term.
Your customers may have the option of extending their loan at then-current interest rates at the end of the balloon period, providing that certain conditions are met. If your customers don't feel they will be able to meet all the refinance conditions or think the balloon term may be up before they are ready to move, this type of loan may not be appropriate for them.
