Loan Types

Conventional

Conforming

• Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMC)
• Fannie Mae - Federal National Mortgage Association (FNMA)

Jumbo-conforming

• Currently between $417,000 and $729,750
• Geographically sensitive (lower in many areas of the country)

Non-conforming

• Above $417,000
• Do not meet other Freddie/Fannie criteria such as employment history, recent bankruptcy, unable to occupy year round (no heat), etc.

 

Government

• FHA – Federal Housing Administration

Tailored to first time and low income homebuyers

• VA – Veterans Administration

Available to members of the armed forces

• VHDA – Virginia Housing Development Authority

Commonwealth of Virginia program for first time homebuyers

 

Portfolio

Loans held by private investors or banks

• Home Equity Loan or Line of Credit
• Credit Union Loans

All loans fall into three basic loan types.  These loan types are fixed rate, balloon payment and adjustable rate.

 

Fixed Rate

• Interest rate is fixed for the duration of loan term
• Interest rate is highest on 30 year rate and decrease if 20 years or less
• Most common terms are 30 years and 15 years
• Loan term can be any number between 30 years and 8 years (i.e. 22 year loan)

 

Amortization Facts:

• After 10 years only 16% of the principle has been paid off
• On a 30 year at 6% for $250,000, borrower will pay $290,000 in interest
• Reducing  your interest rate 1/8th of percent will save approximately $7000 over the life of the loan
• Making one additional payment per year will reduce term by 5.3 years

 

Balloon Payment

• Also called a 30-due-in-7 loan
• Common terms include 5 year and 7 year balloons
• Interest rate is fixed for specified period - at the end of the specified period the remaining balance must be paid in full
• Reputable balloons have a conversion option which allow customers to switch to a fixed rate loan when payment is due
• Often have a negative connotation due to predatory lenders but offer rates more attractive than ARMs with the same initial fixed period
• Best suited for transient homebuyers (first time homebuyer, borrower who relocates often, family situation in which they will out grow the home)

ARM – Adjustable Rate Mortgage

Standard ARM

• Adjusts once a year
• Note interest rate based on a specific yield instrument

One year Tbill
One year LIBOR (London Interbank Offering Rate)

Hybrid ARM

• Fixed rate for a specified period and then adjusts yearly
• Common terms include 3/1, 5/1, 7/1

First number is number of years the rate is fixed. Second number is how often it adjusts subsequent to the fixed period

ARM Caps & Margins

Caps

• Provide borrower protection if interest rates rise to historically high levels
• Three types of Caps:

1 - Initial Adjustment
2 - Yearly Adjustment
3 - Lifetime Cap

Margins

• A fixed amount added to the index to determine new note interest rate
• Awareness of the margin is important for borrower protection
• Often initial interest rates are low but margins are higher than industry standard 
• 2.25% to 2.75% is a standard margin

 

Remember!!!

ARM’s don’t always adjust upward.
If you had an ARM that was adjusting this month,
your new rate would be 4.500%.  Next year, it could only climb to 6.500%.
Still well below the current 30 year fixed rate.