Loan Programs	Advantages	Disadvantages
Fixed Rate Mortgages 30 year fixed 15 year fixed	· Monthly payments are fixed over the life of the loan · Interest rate does not change · Protected if rates go up · Can refinance if rates go down	· Higher interest rate · Higher mortgage payments · Rate does not drop if interest rates improve
Adjustable Rate Mortgages10/1 ARM 7/1 ARM 5/1 ARM 3/1 ARM 1 year ARM 6 month ARM Option ARMS,	· Lower initial monthly payment · Lower payment over a shorter period of time · Rates and payments may go down if rates improve · May qualify for higher loan amounts	· More risk · Payments may change over time · Potential for high payments if rates go up
First Time Home Buyer Programs	· Lower down payment · Easier to qualify · Sometimes you may get lower rates	· May be subject to income and property value limitations.
Stated Income, No Ratio, & No Documentation Loans	· Don’t need to verify income or assets in some cases. · Faster approval	· Higher rates in some cases
No point, No fee Programs	· No closing costs · Less money required to close	· Higher rates · Higher payments
Imperfect Credit Programs / Subprime Lenders	· Potential for reestablishing credit if you pay your mortgage on time. · When used for debt consolidation, you may be able to reduce your monthly debt payment	· Higher rates · Terms may not be as favorable · Harder to get long term fixed loans · Loans may have prepayment penalties
Home Equity Line of Credit	· You only borrow what you need · Pay interest only on what you borrow · Flexible access to funds · Interest may be tax deductible	· Rates can change. · Payments can change
Home Equity Fixed Loan / 2nd’s	· Fixed payments · Interest may be tax deductible	· Higher interest rates than on first mortgages
Fixed Rate Mortgages Fixed Rate mortgages are loans in which your monthly payments for interest and principal are fixed for the life of the loan. Fixed-rate mortgages are available for 10, 15, 20, 30 and even 40 year terms. There are also "bi-weekly" mortgages, which shorten the term of the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 months worth, every year.) Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to fully repay the loan at the end of the term. The most common fixed rate loans are 15 and 30 year mortgages. During the early amortization period, a large percentage of the monthly payment is applied to paying the interest due. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount. Intermediate ARM Mortages A Intermediate ARM mortgage, also called a fixed-period ARM, combines features of both fixed-rate and adjustable-rate mortgages. A Intermediate ARM loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10 years). Then, the loan converts to an adjustable rate mortgage. The appeal of a fixed-period ARM is that the Intermediate ARM initial interest rate for the fixed period of the loan is considerably lower than the rate on a mortgage that's fixed for 30 years. The shorter the fixed term of the loan, the lower the initial interest rate. Adjustable Rate Mortgages (ARMs) Most adjustable rate loans (ARMs) have a low introductory rate or “start rate” a.k.a “teaser rate”, sometimes as much as 5.0% below the current market rate of a 30 year fixed loan. The start rate is typically in effect from as little as 1 month to as long as 10 years. As a rule, the lower the start rate the shorter the time before the loan makes its first adjustment. Index The index of an ARM is the financial instrument that the loan is "tied to” or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security, The Treasury Average, the LIBOR i.e. (London Inter Bank Offered Rate), the Prime Lending Rate, and the11th District Cost of Funds a.k.a.(COFI). Each of these indices can move up or down based on the movement or direction of the financial markets. Margin The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you owe. The margin added to the index is referred to as the fully indexed rate. As an example, if the current index value is 3.0% and your loan has a margin of 2.5%, your fully indexed rate is 5.50%. Margins on loans typically range from 1.75% to 3.5%, depending on the index used, the quality of the loan application, (including the credit scores), the loan size in relation to the value of the property, etc.. Interim Caps Many ARMs carry interim caps of six- months or one year. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate, if rates are falling rapidly. Payment Caps Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or "negative amortization". These loans generally cap your annual payment increases to 7.5% of the previous year’s payment and typically do so for the first five years only. Lifetime Caps Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from one loan program to another. Loans offered with low lifetime caps often have higher margins, and the reverse can also be true. An applicant should carefully consider which feature is more important to them based on their particular scenario and how long they believe they will retain the mortgage. Interest Only Mortgages Interest-only loans can be structured in many different ways. Some are interest only for a set number of years, which then have a balloon payment requiring you to pay off the note, or they can convert to a fully amortized loan after an initial interest-only period. Interest-only features are offered on both true adjustable rate mortgages (ARMs) and on Intermediate ARM programs, i.e. (those that combine the features of a fixed and adjustable mortgage, carrying an introductory fixed rate period of typically, 3, 5, 7 or 10 years, followed by a fully amortizing adjustable period). These loans are attractive if you're trying to stretch your budget to afford a larger mortgage, you don't plan to be in the house for long period of time, you don’t mind that you are covering only the interest due and are not paying down the principal until affordable, you refinance, or sell the property.   As an example, a 10/1 interest-only loan will have a constant interest-only payment amount for the first 10 years. At the end of 10 years, the principal loan amount will have remained unchanged. However, most lenders allow for interest only payments or more, so you can decide each month how much of your payment will go towards the principal, if any.   Interest only mortgages can also be beneficial for those who might not be able to pay principal in the early years, but can make it up later. Greg Hengel P.O. Box 510, Mount Shasta, Ca 96067 (530) 926-1111 or (800) 890-9692