Program Types & Options
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combine the number of program types and the options you have to make a choice of one from hundreds. All can be
used for purchase or refinance a home.
The primary programs are fairly simple and most people are familiar with them. I will list these programs and then
outline features and options.
In an effort to keep this information concise, I am only providing outlines of the most commonly used programs for
first and second mortgages although these represent about 90%+ of the market.
Nearly all of the following programs listed below have an interest only option and most have no prepayment penalty.
If after reading this you would like to discuss your specific situation or would like more in depth information please
see my contact us page.
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In order to pick the right program and options for you, there are a few questions you need to answer.
1. How long do you really intend to stay in the house.
2. Are values in the area increasing, going down or flat.
3. Do you intend to keep the property as a rental
4. Is your income likely to increase
5. Do you have seasonal income fluctuations
6. How much down payment do you have available
FIRST MORTGAGES
Fixed rate mortgages: These are most common loans available and most widely used.
They are available with 30, 25,20,15 and 10 year terms.
The loan is fully paid off at the end of the term (fully amortized) and the rate is fixed for the life of the loan. The
principle and interest payment remains constant.
These loans are available as conventional, FHA, VA and Jumbo.
Intermediate term ARMs: there are four main types of intermediate ARMs 3-1, 5-1, 7-1 & 10-1
This loan has two parts, first is the fixed rate term of either 3,5,7,or 10 years.
A borrower qualifies at the initial fixed rate and the principle and interest payment stays constant for the interim
period. At the end of the interim period the rate is adjusted to the current market and subsequently adjusted either
semi annually or annually based on the index and margin. The rate adjustments do have limitations or caps, which can
vary from lender to lender.
It is important to note that this is an adjustable rate loan and that the rate is likely to go up at the end of the term. It is
also important to understand what the rate caps are, along with which index and margin are being used to determine
rate changes.
This program has the advantage of having lower start rates than fixed mortgages. It also works well if you are not
planning on keeping the property for the long term.
These loans are available as Conventional, FHA, VA and Jumbo.
Adjustable rate mortgages (ARMs): There are several types of ARM programs. The majority of them are
adjustable on a monthly, semi-annual or annual basis. Nearly all of them have limitations (CAPS) on rate adjustments
both for adjustment periods and for the life of loan or ceiling rate.
Rates are based on an index plus a margin. There are several indexes used such as 1 year Tbill, 6 month Tbill,
C.O.F.I. and L.I.B.O.R. Margins generally range from 2.00 to 3.00. There are others with higher margins but these
tend to be associated with higher credit risk borrowers.
It cannot be stressed enough how important it is that a borrower take the time to fully understand how the loan
program they are considering really works. There are several things to know such as; is there a payment cap, is there
negative amortization and is there a conversion option.
The advantage to these loans can be a very low start rate and or payment rate. You can also make principle
reductions and see the affect on your payment the next month. They also can help conserve cash flow for people
who have seasonal income fluctuations.
The basic rule as a borrower is to find the program with a stable index and as low a margin as possible in addition to
low rate caps. I you are not planning on keeping a property long term, these can be a good option.
Balloon note mortgages: There are generally two versions of this type of mortgage.
30 year due in 5 years and 30 due in 7 years. These are fixed rate loans with fixed principle and interest payments
based on a 30 year payment schedule. The difference is that the loan must be paid off at the end of the 5th or 7th
year. Some lenders offer a rollover option to the then current market for a fee.
The fee is only due if you exercise the rollover option and is far less than the cost of a refinance.
The advantage is that the rate offered on the loans is generally lower than standard fixed rate mortgages.
Second mortgages: There are several types of second mortgages but the primary types are ; 20,15 & 10 year
fully amortized, 30 due in 15 and Home equity line of credit (HELOC).
Most are fixed rate loans except for HELOCs, which are mostly based on prime rate and subject to rate changes.
Second mortgages can be done up to 100% of the properties value. They can be used to purchase a property or as
a refinance to pull cash out of a property for improvements or other use.
They are being used more and more by people who have little or minimum down payment available and used in
combination with a fixed rate first mortgage to avoid mortgage insurance.
Nearly all of them base their rates on a borrowers credit score, the higher the score the lower the rate.