TYPES OF MORTGAGES

Fixed Rate Mortgages

On the spectrum of residential mortgage options, the traditional, fixed rate mortgage is the most conservative and predictable. Your interest rate remains the same for the entire term of the loan, and your payments remain the same each month. In the early years of the loan, the vast majority of your monthly payment is interest for the lender and only a small percentage actually helps to reduce your loan balance. The amount of interest that goes to the lender reduces a little bit each month, and the amount of principal that is repaid increases slightly each month.

By the end of the loan term, you have repaid all of the money you borrowed from the lender and will own the property free-and-clear. This can be a good loan option for someone who knows that they will own the home for the rest of their life.

Adjustable Rate Mortgages

As clearly stated in their name, the interest rate charged to the borrower on adjustable rate mortgages (“ARMs”) adjusts based on some predetermined schedule (e.g., monthly, quarterly, semi-annually, or annually). The interest rate is determined by adding a margin (e.g., an interest rate premium) to an underlying index (e.g., LIBOR, MTA, COFI, CMT, etc.), and the sum of these two numbers is the interest rate charged to the borrower until the next time the rate adjusts.

On the spectrum of mortgage options, these loans may be more aggressive or risky than a traditional, fixed rate mortgage because the interest rate and monthly payments may change over time. However, these loans may offer advantages over other types of loans if they are part of a properly structured mortgage plan.

Hybrid Mortgages

A hybrid mortgage is a combination of the fixed rate mortgage and the adjustable rate mortgage. For example, the interest rate for a hybrid loan may be fixed for a certain period of time (e.g., usually 3, 5, 7, or 10 years). After the fixed period, the loan behaves just like a standard adjustable rate mortgage for the remainder of the loan term.

On the spectrum of mortgage options, a hybrid loan is in the middle between fixed rate mortgages and adjustable rate mortgages. A properly structured hybrid loan can be a great option for someone who knows that they will only own the property for a certain period of time. However, you should consult a Mortgage Planner to take your entire set of circumstances into account before deciding on which mortgage is right for you.

Interest Only

In addition to deciding between fixed, adjustable, or hybrid loans, you should have a Mortgage Planner help you evaluate whether you should have an interest only option on your loan. For some people, owning a home without a mortgage is the American Dream, and thus, an interest only loan would probably not be right for this group of people. For others, accumulating sufficient liquid assets to pay off the mortgage balance is their main goal, and an interest only loan can be a great vehicle to help this second group of people accomplish that goal in a shorter period of time than if they were to make extra mortgage payments to the lender.

Regardless of which group you fall into, a Mortgage Planner can show you the advantages and disadvantages of both strategies and let you decide which type of loan structure is right for you.

Pay Option ARMs

On the spectrum of mortgages, the Pay Option ARM can be the most aggressive because you have the ability of negatively amortizing (e.g., your loan balance can actually increase). If mismanaged, this loan can be a poor choice. However, if properly managed, this can be a wonderful option for many people because of the flexibility of monthly payment options.

For example, people with fluctuating incomes (e.g., sales people, business owners, people in the entertainment industry, etc.), real estate investors, and people that are financially sophisticated can be good candidates for this type of loan. As always, your Mortgage Planner should discuss all of the features of this loan to make sure you understand how it can work in your favor. In addition, your Mortgage Planner should review this loan with you at least once a year to make sure the loan is being properly managed to accomplish your goals.

Commercial

If you are buying a residential property with more than four units, you will need a commercial loan. Obviously, you will also need a commercial loan if you are buying any non-residential property. The main difference between commercial and residential lending is that commercial lenders evaluate the cash flow of the property before looking at the financial strength and credit of the borrower, but with residential lending, the lender evaluates the borrower first and the property second.

If you are considering purchasing a commercial property, you should consult a Mortgage Planner to help guide you through the process of evaluating the cash flow potential of a particular property before shopping for loans for that property. In addition, a Mortgage Planner can help you navigate the loan types and features that are unique to the commercial lending arena.