If you are interested in purchasing property or land, chances are you will need some type of loan. Finding the right loan will take time and will differ depending on your financial needs. There are many different factors to consider. Here are a few things to think about.
- Your current financial status.
- How you believe your finances will change over time.
- How many years you plan on keeping your house/land/income-property.
- Would you be comfortable if your mortgage payment changed over time?
To find the best method of financing you should contact a mortgage professional. He or She will be able to discuss your finances, your future plans, and the amount of risk you want to take on. To get started, here are some different types of Loans, and information on how they work!Interest Rate Buy Downs
For an example, if the market currently is trading a fixed rate loan at 8% and at a cost of 1 point, the buy down would allow the borrower of the loan to pay 6% the first year, 7% the 2nd year, and 8% the third year through the rest of the loan (typically 30 years). The cost of this would be a total of 4 points.
Many mortgage companies have constructed different variations of older buy downs. Instead of charging higher points to the buyer at the start of the loan, they increase the loan to cover yields in later years.
The 3-2-1 buy down is another typical buy down. This method works similarly to the 2-1 method. The difference is that with this note, the interest rate starts at 3% below the present loan rate. For further information on interest rate buy downs, please give me a call so that I may refer you to a specialist!
Cost of Funds Index (COFI)
The Federal Home Loan Bank of San Francisco continually publishes the monthly weighted average for the 11th District Fund. Over half of the savings and loan institutions in California are tied to this index. It is comprised of different institutions in not only California, but Arizona and Nevada as well.
When a balloon loan comes to maturity, there is typically still a remaining balance to be paid off. At this time mortgage companies will require the loan to be paid in full. This can either be accomplished by paying the loan off, or by refinancing. Often, companies also have a conversion feature at the end of the Balloon term. One example of this would be if a balloon loan was coming up for expiration, the loan may convert to a 15 or 30 year fixed loan plus a percentage point in surplus of the loan. The balloon mortgage with a conversion option is often called a 7/23 Convertible or a 5/25 Convertible.
Standard ARMS and Their Differences
ARMs that have different indexes are available for refinancing and purchase. To take advantage of falling interest rates, you could purchase an ARM loan that has an index which reacts quickly. On the other hand, if you choose an ARM loan that lags behind, the market will allow you to take advantage of lower rates for a brief time as current market rates are moving upward.
Interest rates and monthly payments with an ARM can be different based on adjustments to the index rate of the loan. There are a few different types of ARM loans. Here are the basics, however, it is encouraged to seek additional assistance before signing for a specific loan.
6 Month Certificate of Deposit (CD) ARM
In this program, the loan has a maximum interest rate adjustment of 1% every six months. These loans can react very fast to movements in the market.
1 Year Treasury Spot ARM
In this program there can be an interest rate adjustment of 2% for every 12 months of the loan. This type of loan can react faster than the Treasury Average index, however, it is slower than the CD index.
6 Month Treasury Average ARM
This loan program typically reacts slower in fluctuating markets so adjustments in the ARM rate will lag behind some other indicators. This program offers an interest trade adjustment of 1% every six months.
1 Year Treasure Average ARM
Similar to the Treasury Spot ARM, this program has a maximum interest trade adjustment of 2% every one year. This type of program typically has a slower reaction in fluctuating markets. This allows for adjustments in the ARM rate to lag behind other indicators.
Fixed Rate Mortgages
There are a few different types of mortgages available. There are 30 year, 20 year, 15 year, and 10 year loans available. There are two distinct features of Fixed Rate Mortgages. The first distinction is that the interest rate will remain fixed for the entire duration of the loan. The second is that payments for the loan are structured so that you will re-pay the loan at the end of the term. Both the 15 year and 30 year mortgages are the most common fixed rate loans.
At the beginning of the amortization period of a Fixed Rate Mortgage the majority of the loan payment is used to pay the interest on the loan. As time goes on this gradually shifts to paying more of the principal amount.