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"How to Pick The Right Loan?"

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Article: "How to Pick The Right Loan?"
By Andre Plessis

Today, you can choose a custom-fitted home loan from a variety of products including 30- or 15- year conventional loans; adjustable-rate mortgages (ARMs) with low introductory rates; 40-year mortgages; interest-only loans, and even ARMs with variable payment options. So what kind of loan is right for you? It depends on where you are in your life cycle. Different people at different ages and stages will have different needs.

What rate can you qualify for? The rate depends on the 7 following criteria: I BET YOU DID NOT KNOW!!!!

  1. Your credit score: The higher your credit score the lower rate you can get.

  2. How you pay your bills: Late payments, collections, judgments, bankruptcies etc... will affect the rate you will get.

  3. How much equity you have in your home: (The more equity you have the less risk for the lender thus you can qualify for a lower rate).

  4. Owner occupied or non owner occupied: If you do not occupy the home, the lender consider this is an investment thus it is a riskier loan for the lender so you will get a higher rate.

  5. Full documentation or no documentation: If the lender can verify your income and assets you will get a lower rate. Stated income or no documentation loans usually exist with individuals that own their own business and cannot provide financial documentation for their income. You will get a higher rate if you choose stated income.

  6. Buy down the interest rate: By paying a certain amount to the lender at the time you make the loan, you can lower your interest rate. A "point" is one percent of the principal amount of the mortgage, paid to the lender. (1 point on a $100,000 loan would be $1,000). Ex: get 5.875% @ 2 pts, you pay $2,000 for $100,000 loan or you get 6.122%.

  7. Type of loans: 15, 30, 40-year fixed or adjustable 1, 2, 3, 5, 7 or 10 years. Rates vary depending on loan type and term . Generally, the shorter the term of a loan, the lower the interest rate you could get.

    8.

30-Year Loan: With fixed rate mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. There are many homeowners who like the idea of a 30-year loan. They like being able to lock into a low interest rate, and they don’t want to face rate changes.

15-Year Loan: Shorter-term loans are also for people who want to lock in a low rate but are both willing and able to make that larger monthly payment in order to build equity-and own their home-more quickly. Generally, the shorter the term of a loan, the lower the interest rate you could get.

Adjustable-Rate Mortgages (ARMs): Those type of loans are fine if you are only going to be in a house for a limited period of time 3 years, 5 years, whatever. You can get ARMs locked in for almost any length of time from 1 to 10 years. The shorter the lock-in time, the lower the interest rate. There are two important points to look at here. First, what is the difference in interest rates between a 30-year fixed and your ARM? Second, what sort of cap is there on the interest rate limiting how high it can climb in case you do stay there a longer time than you expected? Adjustable rates should also be considered by individuals with poor credit. Those individuals can choose a low adjustable rate for 1 or 2 years during that time rebuild their credit, then refinance for a lower rate when the adjustable period ends.

40-Year Mortgage: The 40-year mortgage is all about the size of the monthly payments, since almost no one pays off a 40-year mortgage. Because of the way mortgages are structured and interest is determined, the biggest advantage of a 40-year mortgage is that the monthly payments are smaller. The disadvantage is that you are paying more interest.

Interest-Only Loan: With this loan option, you pay only the interest on the loan for the first 5 to 10 years, so the payments are much smaller. But during that time, you never reduce the principal amount of the loan so you do not build as much equity as if you were paying towards principal. The only way that you accumulate equity in the home is to make direct payments to reduce the principal or if the house increases in value. This loan offers great payment flexibility as you can choose to pay interest only or interest and principal any month you wish. The advantage of this loan product is that the rate can be fixed for the life of the loan. After the initial 5/10-year period the rate will stay fixed.

Option ARMs: Option ARMs can adapt to fit your lifestyle. They offer flexible payment options and qualification standards. With an Option ARM, you can choose from one of four payment choices each month which gives you the flexibility to change your mortgage payment as your needs change.

Option ARMs; 4 Payment Options:

 

  1. Minimum Payment

  2. Interest-Only Payment

  3. Fully Amortized Payment

  4. 15-Year Payment

Those who choose the minimum payment pay no principal, and less interest than what accrues on the loan. The unpaid interest is added to the loan balance, resulting in what’s known as negative amortization. If borrowers continue to make the minimum payment, their loan balance will grow, and if interest rates rise, it will grow even faster. When the balance reaches a certain point usually 110, 115 or 125 percent of the original balance, depending on the loan the loan is "recast" and the minimum payment goes up.

 
 Andre Plessis

Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional whose primary goal is to provide the expertise, guidance and skills necessary to obtain the best mortgage to meet your personal needs".
View Client Testimonials

P.S. If you are at all intimidated or unsure about the mortgage process if you don’t understand how to evaluate your options in getting a mortgage loan our 15 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.

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