You have deceided to buy a home... very exciting! A great first step is to get pre-approved for a loan.
You are welcome to work with whomever you'd like for this process. Our team highly recommends talking with Kim Pedersen, Mortage Banker at Alerus. Visit www.MortgagesbyKim.com to get started on the online application tool.
--- ARMs (Adjustable Rate Mortgages)---
ARM loans are considered to be more risky of an investment. There are a few options that can work to fit your individual needs within various markets.
ARMs that have different indexes are available for refinancing and purchase. To take advantage of falling interest rates, you could purchase an ARM loan that has an index which reacts quickly. On the other hand, if you choose an ARM loan that lags behind, the market will allow you to take advantage of lower rates for a brief time as current market rates are moving upward.
Interest rates and monthly payments with an ARM can be different based on adjustments to the index rate of the loan. There are a few different types of ARM loans. Here are the basics, however, it is encouraged to seek additional assistance before signing for a specific loan.
--- 6 Month Certificate of Deposit (CD) ARM ---
In this program, the loan has a maximum interest rate adjustment of 1% every six months. These loans can react very fast to movements in the market.
1 Year Treasury Spot ARM
In this program there can be an interest rate adjustment of 2% for every 12 months of the loan. This type of loan can react faster than the Treasury Average index, however, it is slower than the CD index.
6 Month Treasury Average ARM
This loan program typically reacts slower in fluctuating markets so adjustments in the ARM rate will lag behind some other indicators. This program offers an interest trade adjustment of 1% every six months.
1 Year Treasure Average ARM
Similar to the Treasury Spot ARM, this program has a maximum interest trade adjustment of 2% every one year. This type of program typically has a slower reaction in fluctuating markets. This allows for adjustments in the ARM rate to lag behind other indicators.
Balloon loans can have different types of maturity rates. The typical Balloon loan has a term of 5 to 7 years if it is a first mortgage. These loans are short term and do not fully amortize over the original term of the loan.
When a balloon loan comes to maturity, there is typically still a remaining balance to be paid off. At this time mortgage companies will require the loan to be paid in full. This can either be accomplished by paying the loan off, or by refinancing. Often, companies also have a conversion feature at the end of the Balloon term. One example of this would be if a balloon loan was coming up for expiration, the loan may convert to a 15 or 30 year fixed loan plus a percentage point in surplus of the loan. The balloon mortgage with a conversion option is often called a 7/23 Convertible or a 5/25 Convertible.
--- Cost of Funds Index ---
The Cost of Funds Index is a weighted average fund. There are two types of funds for each side of the country. In the eastern states this type of fund is commonly referred to as the 1-Year Treasury Security. In the western states the Cost of Funds Index is typically prevalent with the 11th District Cost of Funds.
The Federal Home Loan Bank of San Francisco continually publishes the monthly weighted average for the 11th District Fund. Over half of the savings and loan institutions in California are tied to this index. It is comprised of different institutions in not only California, but Arizona and Nevada as well.
--- Interest Rate Buy Down---
In an interest rate buy down, a buyer typically pays 3 points above the current market in order to pay an interest rate below the market during the first two years of the loan. Then at the end of the two year term, the buyer would then pay the old market rate for the rest of the term of the loan. This is the most common buy down, called the 2-1 buy down.
For an example, if the market currently is trading a fixed rate loan at 8% and at a cost of 1 point, the buy down would allow the borrower of the loan to pay 6% the first year, 7% the 2nd year, and 8% the third year through the rest of the loan (typically 30 years). The cost of this would be a total of 4 points.
Many mortgage companies have constructed different variations of older buy downs. Instead of charging higher points to the buyer at the start of the loan, they increase the loan to cover yields in later years.
The 3-2-1 buy down is another typical buy down. This method works similarly to the 2-1 method. The difference is that with this note, the interest rate starts at 3% below the present loan rate. For further information on interest rate buy downs, please give me a call so that I may refer you to a specialist!
These mortgages are the most common type of mortgage. With a Fixed Rate Mortgage you will have monthly payments that will continue throughout the duration of the mortgage term. In this, you will be paying down both interest and the principal over time. Sometimes you may incur increases in property taxes and in your homeowners insurance, however, your monthly payments will remain stable.
There are a few different types of mortgages available. There are 30 year, 20 year, 15 year, and 10 year loans available. There are two distinct features of Fixed Rate Mortgages. The first distinction is that the interest rate will remain fixed for the entire duration of the loan. The second is that payments for the loan are structured so that you will re-pay the loan at the end of the term. Both the 15 year and 30 year mortgages are the most common fixed rate loans.
At the beginning of the amortization period of a Fixed Rate Mortgage the majority of the loan payment is used to pay the interest on the loan. As time goes on this gradually shifts to paying more of the principal amount.