Understanding Real Estate Loans

Not all loans are created equal!

When shopping for alone do not make the mistake of looking only at interest rates. The cost of a mortgage can vary based on the length of the loan, interest rate, amortization schedule, points, and fees – just to name a few variables. Make sure to get a “Good Faith Estimate” which will include the cost and terms of the loan.
When comparing rates, make sure you compare the APR (annual percentage rate) which adds the costs of the loan into the rate giving a true picture of the actual rate.

What’s Your Goal?

Choosing the right mortgage for your lifestyle could have a substantial impact on your retirement, your net worth, and your family’s future lifestyle. It is critical that you choose a loan program that fits your needs as well as you future goals. Here are a few choices you may want to consider.

If you plan to move or refinance within the next 5 to 7 years…

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM) These increasingly popular ARMS — also called 3/1, 5/1 or 7/1 — can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.

If you plan to stay in your home for at least 7 years…
Thirty-Year Fixed Rate Mortgage The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for than adjustable rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.

Fifteen-Year Fixed Rate Mortgage

This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate — and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often a safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great. See extra payments.

If your income varies throughout the year…

Negative Amortization (Neg. Am) Loan This is a deferred-interest loan which is very powerful — and the most misunderstood mortgage program because of its many options. Basically, the lender allows the borrower to make monthly payments that are less than the accruing interest. Therefore, if the borrower chooses to make the minimum monthly payment, the loan balance will increase by the amount of interest not paid on the loan. The power of this loan lies in the borrower’s ability to choose between making the full loan payment, or the minimum payment, or any amount in between. If a borrower’s income varies throughout the year (due to commissions, bonuses, etc.), the borrower can make a lower payment during the “lean times”, and then make higher payments when funds are readily available.

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Mike Esteb

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