Before purchasing or refinancing, it is a good idea to understand the
different types of loans available to you. There are basically two types of
loans, fixed rate loans and adjustable rate loans. Please see below for
definitions of the different loans available. If you are looking to purchase or refinance and would like to get pre-approved, please click here to apply.
Fixed Rate Loans
With a fixed rate loan, the total loan
payment (principle & interest) does not change for the life of
the loan. Most fixed rate loans are available for 40, 30, 20,
15, or 10 years. These loans are fully amortized.
This means that they will pay off by the end of the loan period.
These are the most stable of all the loans available since the
interest rate does not change over the life of the loan.
The most common fixed rate loan is the 30 year amortized.
40 Year Fixed Rate Amortized
This loan is the longest term available under
the fixed rate loan options. The payment on this loan is
lower than the 30 year loan. Many people choose this loan
if they want a lower monthly payment that has a fixed rate.
This allows the borrower to qualify for a higher loan amount.
The negative on this loan is that you end up paying quite a bit
more in interest over the life of loan because the term is
stretched out to 40 years.
Interest only loans are
available under fixed rate programs and adjustable rate
programs. Interest only loans are not available under FHA
or VA loans at this time. Interest only loans allow the borrower to pay an
interest only payment on the loan for a specified period of
time, usually 10 years. After the interest only period is
up, the loan will amortized for the remaining period of time
left on the loan. The loan balance will not change or go
down during the interest only period as it would on a fully
amortized loan. The benefit to this loan is that you would
have a lower payment for the interest only period. For
more information please see
here for our Interest Only webpage.
Adjustable rate programs
come in many different forms. Some will be a fixed rate
for the first 3, 5, 7, or 10 years and then change into an
adjustable rate loan and some will start out from the beginning
as an adjustable rate loan. There are also negative amortized
adjustable rate loans. Please see below for further
details on that loan. You should always read your Promissary
Note and Trust Deed when signing your loan documents to be sure
you understand how these loans will adjust. The benefit of
adjustable rate loans are that the payments are usually lower
for the fixed rate period than on a 30 year fixed rate loan.
The negative is that the payment can go up significantly after
the fixed rate period.
Conventional loans may be conforming or non-conforming loans.
Conforming loans are loans that are usually purchased by Fannie
Mae and Freddie Mac. These two companies buy loans that
comply with their set of guidelines. Freddie Mac and
Fannie also sets the maximum loan amount, credit requirements
and property requirements that they will allow. At this
time, the conforming limit is at $417,000 for single family
residences in high cost areas. In the beginning of this
year both companies expanded the type of loans they would buy
and these are called Jumbo Conforming Loans. These loans
are priced a little bit higher than the loans that fall under
the $417,000.00 loan amount. Please call me for pricing
FHA loans are government sponsored loans. FHA will go
up to 96.5% LTV on purchases and no cash out refinances. They will
go up to 85% LTV on cash out loans. FHA is available for a 30
year and 15 year fixed rate loan. They also have buydown
loans and adjustable rate programs. The benefits to the
FHA loan is that you can purchase a new home with a minimal down
payment. They will consider loans for people that have no credit
history and for people that have some credit problems, FHA does not have a
minimum credit score requirement. However, in today's mortgage market, many lenders have put a minimum score requirement of 620 for FHA loans. Also, the mortgage insurance
is usually lower than a conventional loan and the seller can pay
up to 6% of the purchase price toward your closing costs. Click here to get pre-approved for an
Jumbo loans are loans that are above the
limit established by Fannie Mae and Freddie Mac. Jumbo
loans are usually priced a little bit higher than Conforming
loans. Guidelines may also vary to some degree than on
conforming loans. If you are looking for a Jumbo Loan,
please call me at 818-920-1600 to discuss all of your options.
Balloon loans are a 30 year amortized
short term fixed rate loan. These loans are usually fixed
for 3, 5, or 7 years. The balloon loans are different than
the Adjustable loans that have a fixed rate period that is
explained above. At the end of the fixed rate period on
balloon loans, the entire loan balance is due and payable.
These loans usually have lower interest rates than a regular 30
or 15 year fixed rate.
If you are a veteran, you are entitled to
receive a veteran loan. There are many benefits of a V.A. loan
compared to a conventional loan. There are many benefits of a VA
loan. Here are a few of the benefits:
Negative Amortized Adjustable Rate
Loans also known as Pay Option Arms
Most of the adjustable rate loans that borrowers have received
in the past few years were the Pay Option Arms. These
adjustable rate loans have the possibility of negative
amortization. Negative amortization happens when you make
the minimum monthly payment and not the actual note rate (index
+ margin, in most cases) on your loan. The note rate is usually
much higher than your minimum payment. The difference between
the note rate and your minimum payment gets added to your
mortgage balance each month. For further detail on these
Things to Ask
Here is a list of things to ask when you are
looking for a loan.
1. Is there a
pre-payment penalty on the loan?
A prepayment penalty is a penalty that is
paid to the lender if you pay off the loan within a certain
period of the initial loan date. The calculation for most
California pre-payment penalty is as follows:
80% of the balance of the loan times 6 months
2. Is this a
fully amortized loan or is it interest only?
A fully amortized loan will pay off by the
end of the loan period. An interest only loan will only
pay the interest on the loan and the principle balance will not
go down unless additional principle payments are made.
3. What are the
points on this loan?
Points paid determine the interest rate
received by the borrower. One point equals 1% of the loan
amount. The higher the points paid, the lower the interest rate
that is received by the borrower.
4. Are there any
upfront costs on this loan?
Some companies charge an upfront non
refundable fee to process your loan application. We do not
charge such a fee. The only other upfront fee that may be
charged is the appraisal fee. This is quite normal.
The appraisal fee is used to pay the independent appraiser that
was used to appraise the property.
5. Are the taxes
and insurance included in my payment?
Depending on your loan-to-value, you may have
the option to have your taxes and insurance impounded. On
most loans that are over 90% LTV, you must have them impounded.
Below 90%, you should have a choice of whether you want impounds
or not. If you do not want impounds, most lenders have a
.25 point that is added to the closing costs. If you have
an impound account, then you will pay your taxes and insurance
with your monthly mortgage payment. The lender will then
pay the taxes and insurance when they are due. The
positives to having an impound account are that you will not
have to come up with a lump sum when the taxes and insurance are
due each year and you will not have to pay the extra .25 in
points on your closing costs. The negative is that you
will have to pay a few months (between 3 - 10) of taxes upfront
to put in the impound account. This amount will depend on
taxes will be coming due. The closer the date that they
are due, the more months required at closing.