Different Types of Loans
Understanding Different Loan Types
The market today has been reduced to more traditional loan programs. The standards of today are fixed, adjustable, hybrid and flexed fixed. With these financing packages one can be tailored to meet your financial goals.
While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Though this article discusses some of the more common loan types, you should spend time talking with your lender before deciding on the right loan for your situation.
Categories of loans:
Typically loans fall into one of three major categories: fixed rate, adjustable and hybrid loans that combine features from both the fixed rate and adjustable.
Fixed Rate Mortgages:
As the name describes, the mortgage is based on a fixed rate at a fixed term. The term can range from 10 to 30 years and in some cases can go to 40 years. The fixed rate mortgage has been the reliable tradition for all time. You can plan a budget based on a known monthly payment, the principal and interest does not change, you can pre-pay the mortgage, allowing you to pay the loan off early.
Adjustable Rate Mortgage:
Adjustable Rate Mortgages as the name implies change based on a new rate and new principle balance at the time of adjustment. For some people the adjustable rate is the right program. Typically a life event is going to occur in future that will allow them to pay down the balance, have another income enter into the family or just want a potentially lower payment for the first few years of the mortgage. Adjustable rate mortgages over history have a lower initial interest rate which would mean a lower payment.
The interest rate at time of adjustment is based on an index typically the one year treasury index or more recently the LIBOR, (London Inter Bank Rate) and a margin. The margin typically is 2.75%. You add the two together and that would be the rate for the ensuing time frame. The rate on most adjustable can go up or down by no more than 2% per change and no higher or lower than 6% over the life of the loan.
Hybrid Loans:
Hybrid loans combine the features of both fixed rate and adjustable rates. A hybrid will start with a moderate fixed term (5, 7, 10 years) and then will go to a 1 year adjustable for the remaining time of the loan. The same principal for adjustment as above applies with the exception of the first adjustment. Some Hybrids at the first adjustment will change by up to 5% maximum after the initial fixed term. As with the adjustable a future life event may occur; an additional income source, additional monies to pay down the mortgage, or a time frame of staying in the home.
Another possible feature could be an interest only feature for the fixed time frame. This would mean a lower monthly payment in the first years of the mortgage but would also translate to a higher payment after the fixed term.
Balloon Payments:
A balloon payment refers to a loan that has a large, final payment due at the end of the loan. For example, there are currently fixed-rate loans which allow homeowners to make payments based on a 30-year loan, even though the entire balance of the loan may be due (the balloon payment) after 7 years. As with some hybrid loans, balloon loans may be attractive to homeowners who plan to have a future life event occur. In the case of a balloon, it could be another property selling, an inheritance, or a planed move.
Strategies of mortgage planning
The general theme when planning a mortgage strategy is to ask your self several questions. These questions are:
1) How long do I plan to stay in the home?
2) How much do I want my payments?
3) How much money do I want to commit to the transaction?
Given question 2 and 3 being equally important, which one is more important?
While time is important when designing a mortgage program it is question 2 and 3 which to most people are the important ones. Time is used more for deciding a permanent buy-down of the rate is rational. The rates on the fixed and adjustable are not different as they have been in the past.
FHA :
Federal Housing Administration loans, aka FHA, are backed by the federal government by insuring the loan in cases of default. The loan requires 3.5% down and has higher qualifying ratio’s. Used predominately with borrows with limited cash resources
VA:
Veterans Administration loans, AKA VA, are loans made to qualified veterans. They do not require a down payment and are used for Veterans of the armed forces and some other government entities. VA is entitling the loan only in cases of default.
VHDA:
Virginia Housing and Development Authority, AKA VHDA, Issues bonds that are tax free in some cases and lends monies to first time homebuyers. There loans can be combined with FHA, VA, RD and conventional loan mortgage insurance. There loans have income and sales price limitations. http://www.vhda.com/ .
Conventional Loans:
A conventional loan is simply a loan offered by a traditional lender. They may be fixed-rate, adjustable, hybrid or other types. While conventional loans may be harder to qualify for than government-backed loans, they typically have higher credit scores and tighter qualifying ratios.
By:Leonard Winslow
Dominion Trust Mortgage
www.dominiontrustmortgage.com/leonard.winslow
434-760-2580
Rob Alley, Realtor of The Avery Group at Roy Wheeler
540-250-3275 (cell) roballey@roywheeler.com http://www.robsellscharlottesville.com/ http://www.forestlakesliving.com/ http://www.charlottesvillevarealestate.blogspot.com/ http://www.charlottesvilleshortsale.com/
The market today has been reduced to more traditional loan programs. The standards of today are fixed, adjustable, hybrid and flexed fixed. With these financing packages one can be tailored to meet your financial goals.
While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Though this article discusses some of the more common loan types, you should spend time talking with your lender before deciding on the right loan for your situation.
Categories of loans:
Typically loans fall into one of three major categories: fixed rate, adjustable and hybrid loans that combine features from both the fixed rate and adjustable.
Fixed Rate Mortgages:
As the name describes, the mortgage is based on a fixed rate at a fixed term. The term can range from 10 to 30 years and in some cases can go to 40 years. The fixed rate mortgage has been the reliable tradition for all time. You can plan a budget based on a known monthly payment, the principal and interest does not change, you can pre-pay the mortgage, allowing you to pay the loan off early.
Adjustable Rate Mortgage:
Adjustable Rate Mortgages as the name implies change based on a new rate and new principle balance at the time of adjustment. For some people the adjustable rate is the right program. Typically a life event is going to occur in future that will allow them to pay down the balance, have another income enter into the family or just want a potentially lower payment for the first few years of the mortgage. Adjustable rate mortgages over history have a lower initial interest rate which would mean a lower payment.
The interest rate at time of adjustment is based on an index typically the one year treasury index or more recently the LIBOR, (London Inter Bank Rate) and a margin. The margin typically is 2.75%. You add the two together and that would be the rate for the ensuing time frame. The rate on most adjustable can go up or down by no more than 2% per change and no higher or lower than 6% over the life of the loan.
Hybrid Loans:
Hybrid loans combine the features of both fixed rate and adjustable rates. A hybrid will start with a moderate fixed term (5, 7, 10 years) and then will go to a 1 year adjustable for the remaining time of the loan. The same principal for adjustment as above applies with the exception of the first adjustment. Some Hybrids at the first adjustment will change by up to 5% maximum after the initial fixed term. As with the adjustable a future life event may occur; an additional income source, additional monies to pay down the mortgage, or a time frame of staying in the home.
Another possible feature could be an interest only feature for the fixed time frame. This would mean a lower monthly payment in the first years of the mortgage but would also translate to a higher payment after the fixed term.
Balloon Payments:
A balloon payment refers to a loan that has a large, final payment due at the end of the loan. For example, there are currently fixed-rate loans which allow homeowners to make payments based on a 30-year loan, even though the entire balance of the loan may be due (the balloon payment) after 7 years. As with some hybrid loans, balloon loans may be attractive to homeowners who plan to have a future life event occur. In the case of a balloon, it could be another property selling, an inheritance, or a planed move.
Strategies of mortgage planning
The general theme when planning a mortgage strategy is to ask your self several questions. These questions are:
1) How long do I plan to stay in the home?
2) How much do I want my payments?
3) How much money do I want to commit to the transaction?
Given question 2 and 3 being equally important, which one is more important?
While time is important when designing a mortgage program it is question 2 and 3 which to most people are the important ones. Time is used more for deciding a permanent buy-down of the rate is rational. The rates on the fixed and adjustable are not different as they have been in the past.
FHA :
Federal Housing Administration loans, aka FHA, are backed by the federal government by insuring the loan in cases of default. The loan requires 3.5% down and has higher qualifying ratio’s. Used predominately with borrows with limited cash resources
VA:
Veterans Administration loans, AKA VA, are loans made to qualified veterans. They do not require a down payment and are used for Veterans of the armed forces and some other government entities. VA is entitling the loan only in cases of default.
VHDA:
Virginia Housing and Development Authority, AKA VHDA, Issues bonds that are tax free in some cases and lends monies to first time homebuyers. There loans can be combined with FHA, VA, RD and conventional loan mortgage insurance. There loans have income and sales price limitations. http://www.vhda.com/ .
Conventional Loans:
A conventional loan is simply a loan offered by a traditional lender. They may be fixed-rate, adjustable, hybrid or other types. While conventional loans may be harder to qualify for than government-backed loans, they typically have higher credit scores and tighter qualifying ratios.
By:Leonard Winslow
Dominion Trust Mortgage
www.dominiontrustmortgage.com/leonard.winslow
434-760-2580
Rob Alley, Realtor of The Avery Group at Roy Wheeler
540-250-3275 (cell) roballey@roywheeler.com http://www.robsellscharlottesville.com/ http://www.forestlakesliving.com/ http://www.charlottesvillevarealestate.blogspot.com/ http://www.charlottesvilleshortsale.com/
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