Does A Home Really Have To Cost An ARM And A Leg?
Monday, November 15, 2004
In the last few years, home purchases have skyrocketed nationwide, as consumers have taken advantage of record low interest rates. With rates raised an additional quarter percent on September 21st, homebuyers are scrambling to get in on low rate loans before they are shut out of the market entirely. In terms of economic activity, California makes up about ten percent of the total loan origination market of the United States!
It is difficult to predict where rates will be in six to twelve months since outside forces, such as the price of oil which recently broke the $50 a barrel, can impact interest rates causing them to fluctuate. Amid this uncertainty, lenders nationwide are finding ways to help homebuyers in an increasingly difficult lending market. Here are just some of the innovative and traditional financing options available today:
1. Portable Mortgages: This is one of the newest mortgage options available. It allows buyers a one-time transfer of an existing mortgage from one property to another. This unique type of mortgage is ideal for buyers who want to buy a home, but anticipate they will trade up or trade down in the near future. The buyer can take the portable mortgage and move it to the next property, but only once and not for refinancing. While a portable mortgage is a nice buffer if interest rates increase, it is not without a price: the portable mortgage carries a 3/8% premium on the rate.
2. Conventional Loans: The original conventional loan is a fixed-rate that typically appeals to the more conservative home buyer. Since the interest rate is locked in at the start, monthly loan payments are exactly the same for the life of the loan. The most popular are the 15 and 30-year fixed, which typically require down payments of 10 to 20 percent of the purchase price. The 15 year loan is harder to qualify for, but the total interest paid is lower. Overall, borrowers will pay less than half the amount of total interest that a 30 year borrower would pay. The longer term fixed loan is a good option for a buyer who plans to stay put or purchase a long term income property.
3. ARMs and Interest Only Loans: Adjustable rate mortgages (ARMs) have an interest rate that is adjusted at specified intervals - typically three, five, seven, or even ten years, with a lifetime cap to protect the borrower. The starting interest rate is generally lower on ARMs than most other types of loans, which appeals to cash-strapped buyers and/or those expecting to move in five to seven years. Fluctuations in the rate are tied to a specified economic index, such as the LIBOR, and the rate is adjusted according to the index. ARM’s are a gamble. If the index rises, the borrower will end up paying more per month than with a locked in 30 year fixed-rate loan. However, if the index rate drops, or the home is sold within that five years, the borrower could save a substantial amount of money versus a fixed-rate loan.
Also common are interest only loans, where the borrower pays only the interest owed on the loan for the first five, ten, or fifteen years. The monthly payments are lower than they would be with a Conventional or ARM, but at the end of that time, the borrower still owes the entire amount borrowed with no principal of the loan paid back. Borrowers should also make sure they are able to afford the higher monthly payments that kick in at the end of the initial offering period.
4. Piggyback Mortgages: These have become popular as it enables homebuyers to avoid paying private mortgage insurance (PMI) each month combined with a lower down payment requirement. Lenders usually require PMI policies when a down payment is less than 20 percent of the appraised value of the home. This is protection for the lender in case of borrower default. The piggyback loan stacks a small second mortgage on top of the first. The most common are designed with an 80 percent primary loan, a 10 percent secondary loan, and a 10 percent down payment. The interest on the second loan is tax deductible and the borrower builds up equity faster than the traditional home loan. In addition, piggyback loans can also make higher priced homes more accessible to buyers.
5. 100 Percent Financing: Many lenders now offer 100 percent financing, targeting people with good credit, but not a lot of cash to put down. These loans carry a slight increase in the interest rate, but require expensive PMI that can make monthly payments higher. Warning: Since borrowers do not have any equity in the property with this type of loan, they could end up owing more than their homes is worth with even the slightest downturn in property values.
With such an array of choices, figuring which options are the most appropriate can be very confusing. If you need more information, I’ll be happy to get you in touch with a professional lender.
It is difficult to predict where rates will be in six to twelve months since outside forces, such as the price of oil which recently broke the $50 a barrel, can impact interest rates causing them to fluctuate. Amid this uncertainty, lenders nationwide are finding ways to help homebuyers in an increasingly difficult lending market. Here are just some of the innovative and traditional financing options available today:
1. Portable Mortgages: This is one of the newest mortgage options available. It allows buyers a one-time transfer of an existing mortgage from one property to another. This unique type of mortgage is ideal for buyers who want to buy a home, but anticipate they will trade up or trade down in the near future. The buyer can take the portable mortgage and move it to the next property, but only once and not for refinancing. While a portable mortgage is a nice buffer if interest rates increase, it is not without a price: the portable mortgage carries a 3/8% premium on the rate.
2. Conventional Loans: The original conventional loan is a fixed-rate that typically appeals to the more conservative home buyer. Since the interest rate is locked in at the start, monthly loan payments are exactly the same for the life of the loan. The most popular are the 15 and 30-year fixed, which typically require down payments of 10 to 20 percent of the purchase price. The 15 year loan is harder to qualify for, but the total interest paid is lower. Overall, borrowers will pay less than half the amount of total interest that a 30 year borrower would pay. The longer term fixed loan is a good option for a buyer who plans to stay put or purchase a long term income property.
3. ARMs and Interest Only Loans: Adjustable rate mortgages (ARMs) have an interest rate that is adjusted at specified intervals - typically three, five, seven, or even ten years, with a lifetime cap to protect the borrower. The starting interest rate is generally lower on ARMs than most other types of loans, which appeals to cash-strapped buyers and/or those expecting to move in five to seven years. Fluctuations in the rate are tied to a specified economic index, such as the LIBOR, and the rate is adjusted according to the index. ARM’s are a gamble. If the index rises, the borrower will end up paying more per month than with a locked in 30 year fixed-rate loan. However, if the index rate drops, or the home is sold within that five years, the borrower could save a substantial amount of money versus a fixed-rate loan.
Also common are interest only loans, where the borrower pays only the interest owed on the loan for the first five, ten, or fifteen years. The monthly payments are lower than they would be with a Conventional or ARM, but at the end of that time, the borrower still owes the entire amount borrowed with no principal of the loan paid back. Borrowers should also make sure they are able to afford the higher monthly payments that kick in at the end of the initial offering period.
4. Piggyback Mortgages: These have become popular as it enables homebuyers to avoid paying private mortgage insurance (PMI) each month combined with a lower down payment requirement. Lenders usually require PMI policies when a down payment is less than 20 percent of the appraised value of the home. This is protection for the lender in case of borrower default. The piggyback loan stacks a small second mortgage on top of the first. The most common are designed with an 80 percent primary loan, a 10 percent secondary loan, and a 10 percent down payment. The interest on the second loan is tax deductible and the borrower builds up equity faster than the traditional home loan. In addition, piggyback loans can also make higher priced homes more accessible to buyers.
5. 100 Percent Financing: Many lenders now offer 100 percent financing, targeting people with good credit, but not a lot of cash to put down. These loans carry a slight increase in the interest rate, but require expensive PMI that can make monthly payments higher. Warning: Since borrowers do not have any equity in the property with this type of loan, they could end up owing more than their homes is worth with even the slightest downturn in property values.
With such an array of choices, figuring which options are the most appropriate can be very confusing. If you need more information, I’ll be happy to get you in touch with a professional lender.