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Types Of Loans
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30 Year Fixed
The interest rate for this loan will stay the same for the entire term of the loan. The term for this loan is 30 years. Payments are calculated so that you make a monthly payment for 30 years (360 payments total) and pay the loan off in full at the end of that 30-year period.
15 Year Fixed
The interest rate for this loan will stay the same for the entire term of the loan. The term for this loan is 15 years. Payments are calculated so that you make a monthly payment for 15 years (180 payments total) and pay the loan off in full at the end of that 15-year period. Interest rates for this loan are generally slightly lower then for a 30 year fixed rate loan. Because the loan is paid in full in 15 years, the payments are larger. Qualifying for this loan is more difficult because of the larger payments. Because you pay off your loan in half the time of a 30-year fixed, you will pay much less interest on this loan.
10 Year Fixed
The interest rate for this loan will stay the same for the entire term of the loan. The term for this loan is 10 years. The interest rate is generally less then that of a 15-year loan but not always. Some 10-year fixed rate loans are paid in full in 10 years. The payment on this type of 10 year fixed is much larger and harder to qualify for. The borrower will pay much less interest on this loan because of the short term.
10/1 ARM
The interest rate for this loan will stay the same for the first 10 years. The term for this loan is 30 years. At the end of the first 10 years this loan will automatically adjust to an adjustable rate mortgage. Usually the adjustable rate mortgage is a one-year Treasury arm. The interest rate for this loan will adjust once per year. The first adjustment may be larger than the remaining adjustments. You should check to see if this loan has a cap on the maximum it would adjust at the first adjustment. The loan should also have a cap for the maximum percentage that it can adjust each year after the first adjustment. Usually with a treasury arm loan the cap is 2% every year. You also need to check that this loan has a cap on the maximum percentage it can adjust during the term of the entire loan. Be sure to calculate your payment based on the total maximum payment your loan could ever reach. That way you will know if you can make that payment without any financial difficulty.
7/1 ARM
The interest rate for this loan will stay the same for the first 7 years. The term for this loan is 30 years. The interest rate for the first 7 years is generally less then a 10/1 ARM. At the end of the first 7 years this loan will automatically adjust to an adjustable rate mortgage. Usually, the adjustable rate mortgage is a one-year Treasury Arm. The interest rate for this loan will adjust once per year. The first adjustment may be larger than the remaining adjustments. You should check to see if this loan has a cap on the maximum it would adjust at the first adjustment. The loan should also have a cap for the maximum percentage that it can adjust each year after the first adjustment. Usually, with a treasury arm loan the cap is 2% every year. You also need to check that this loan has a cap on the maximum percentage it can adjust during the term of the entire loan. Be sure to calculate your payment based on the total maximum payment your loan could ever reach. That way you will know if you can make that payment without any financial difficulty.
5/1 ARM
The interest rate for this loan will stay the same for the first 5 years. The term for this loan is 30 years. The interest rate for the first 5 years is generally less than a 7/1 ARM. At the end of the first 5 years this loan will automatically adjust to an adjustable rate mortgage. Usually the adjustable rate mortgage is a one-year Treasury Arm. The interest rate for this loan will adjust once per year. The first adjustment may be larger then the remaining adjustments. You should check to see if this loan has a cap on the maximum it would adjust at the first adjustment. The loan should also have a cap for the maximum percentage it can adjust during the term of the entire loan. Be sure and calculate your payment based on the total maximum. That way you will know if you can make the payment without any financial difficulty.
3/1 ARM
The interest rate for this loan will stay the same for the first 3 years. The term for this loan is 30 years. The interest rate for the first 3 years is generally less than a 5/1 ARM. At the end of the first 5 years this loan will automatically adjust to an adjustable rate mortgage. Usually the adjustable rate mortgage is a one-year Treasury Arm. The interest rate for this loan will adjust once per year. The first adjustment may be larger than the remaining adjustments. You should check to see if this loan has a cap on the maximum it would adjust at the first adjustment. The loan should also have a cap for the maximum percentage it can adjust during the term of the entire loan. Be sure and calculate your payment based on the total maximum payment your loan could ever reach. That way you will know if you can make the payment without any financial difficulty.
1 Year Treasury ARM
The term of this loan is 30 years. This loan has a low start rate that stays in effect for the first year. The index for a One-Year Treasury Arm is the One-Year Treasury bill. The index is based on the interest rate that the government pays on some of it's debt. At the end of the first year the rate will adjust to the fully indexed rate as long as it does not exceed the maximum periodic cap of 2%. There is a life cap on this loan, which is usually around 6% over the start rate.
Adjustable Rate Mortgage
The term of this loan is 30 years. This loan usually has a low start rate. The length of time the start rate will remain in effect depends on the type of arm loan you choose. This low start rate is sometimes called a "introductory rate". The interest rate your loan should actually be at is called the "fully indexed rate".
The "fully indexed rate" is based upon two things: The margin and the index of your loan. The index is what the lender uses as a reference for what it might cost to take in money that it can then lend. There are several different indexes. If you chose an adjustable rate loan you need to understand the index that is tied to that particular loan. It is a good idea to get a copy of how a particular index has changed over the past 10 years or longer. Compare the different indexes. Some adjust quickly to market conditions. This can be a good thing if rates are going down. You would want a slower moving index if you thought that rates were going to go up. The index changes through-out your loan term.The margin is the mark-up that lenders charge to be added onto or to the index.
The margin that a lender offers you can vary. Usually a lower margin means higher points or a higher start rate but not always.
Once you lock in your loan, you are locking in the margin. It will never change during the entire term of the loan. The margin will always be added to the current index. If your start rate is 6%, your interest rate would stay at 6% until the first adjustment. If the current index is 5.36% and your margin is 2.5%, that would make the fully indexed rate 7.86%. At the first adjustment, (if the index stayed the same) your payment would adjust to the fully indexed rate of 7.86%. Even if you had a cap on the first adjustment of 2%, your rate would still increase in this instance because your new rate is below 8%. Adjustable rate mortgages usually have periodic "caps" built into the loan. The periodic caps set limits on the percentage a rate can adjust at each increase. There is also a cap for the maximum percentage that the rate can increase over the entire loan period. Pay attention to these caps because they limit your increases. Have your maximum worst case payment figured in advance. That way you know in advance what the highest payment could be. If you feel the maximum payment would hurt you financially, you shouldn't get an adjustable loan. If market conditions stay favorable, your rate should not increase much beyond the fully indexed rate. Rates can also adjust downward in a good market.
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