May 27th, 2014 11:14 AM by Jackie A. Graves, President
Homebuyers hoping to
jump into the mortgage market will find three basic types of loans, for the
With a fixed-rate
home loan, your interest rate remains the same for the life of the loan and the
payment is split into equal monthly payments for the duration. In other words,
it is amortized over the life of the loan.
The interest payments are front-loaded, however, so that
during the first few years of the loan term, only a small portion of the
payment pays off the principal. To see an example of an amortization schedule,
plug in some hypothetical numbers in Bankrate's mortgage
Most commonly taken
as a 30-year loan, fixed-rate mortgages can be shorter in duration or, more
loans can be 10 years, 15 years or 20, but most popular is the 30-year because
that makes your payment the lowest," says Floyd Walters, owner of BWA
Mortgage in La Canada Flintridge, Calif.
During the height of
the real estate bubble, news broke about even longer loan terms, with some
mortgages being offered for a long as 50 years. Those may have been more of an
urban myth than reality, says Walters.
"To be honest, I
never saw a real offering for a 50-year mortgage. I did see just a few lenders
offering a 40-year mortgage," he says.
An extremely long
mortgage term offers few advantages to consumers.
"On a fully
amortized 30-year fixed-rate loan at 5.25 percent for $250,000, the payments
would be $1,380 per month. Take that same loan out another 10 years to a
40-year note and the payments drop but only to $1,247 per month. You save $133
per month but it adds 10 years to your note with a net cost of an additional
$100,000 or so," Walters says.
Unlike a fixed-rate
home loan, which sports a static interest rate over the life of the loan, the
interest rate on an adjustable-rate mortgage, or ARM, changes every year.
ARMs come in various
permutations. For instance, a hybrid ARM features aspects of both adjustable
and fixed-rate mortgages.
mortgages can be anything from a three-year, five-year, seven-year or 10-year
fixed interest rate period," says Mark Klein, president of Pacific Coast
Lending in Agoura Hills, Calif. After the fixed-rate period, the loan is
amortized over the balance of the term with a rate that adjusts annually.
Conversely a one-year
ARM has no fixed-rate period. Though they are still available, they're not
widely offered, says Walters.
"It's hard to
believe there are very many people taking a one-year. I haven't done one for
years and years. It's just not a product that feels right," he says.
One circumstance when
they might be appropriate would be in a high fixed-rate environment.
"If I could take
a one-year ARM that was 1 or 2 percentage points below what I could get as a
fixed-rate mortgage, and if I could get some interest rate caps built in, I
would analyze it. If we were in a high fixed-rate environment, it might appear
more attractive," Walters says.
By Sheyna Steiner •
Bankrate.com - To view the original article click here