Believe me, all the different types of loans can be quite intimidating to someone uneducated on the subject.  In fact, most people in America don’t know hardly anything about their financing options.  But don’t worry. That’s to be expected.

BASIC LOAN TYPES

The type of mortgage that the majority of people today will get is know as the traditional fixed rate mortgage, or FRM. Over 70% of homeowners this year will get this type of financing for their new home. The main reason for this is that the FRM offers a much stronger sense of stability over the other types of financing. Whether the life of your loan spans 15 or 30 years, the interest rate of this loan is locked in at origination and will not change, no matter what happens to the economy or the mortgage market.

The other main type of loan is called an Adjustable Rate Mortgage, or ARM loan.  This type has an interest rate that is tied to an index, and can rise or fall depending on the current mortgage market.  In general, if the prevailing market increased during one adjustment period (which is specified when you close the loan) then your interest rate will rise, along with your payment.  Adversely, your payment amount will drop if the market drops.

The main reason some people decide to go with an ARM loan is that it will initially offer you a much lower interest rate, which means your monthly payment will be significantly cheaper.  That dark side is that your interest rate can sky rocket, leaving you with a mortgage payment that can be hard to pay every month.  Luckily, though, when you go to your closing, caps are usually set on how high your rate can go.  Be careful though. Make sure you know what you’re doing before you get setup in one of these loans.

OTHER LOAN TYPES

Payment Option ARMs. You may hear this type of mortgage referred to as a “flexible payment ARM.”  These loans have an interest rate that adjusts every month (like a regular ARM loan) but with no adjustment caps, meaning the sky is the limit.  The draw of these loans is that they allow homeowners to make a very low initial monthly payment, but unfortunately the amount will often jump up over time, and usually quite steeply.

Interest Only Mortgages. This type of loan allows borrowers to pay only the interest portion of their payment for a certain amount of time.  This is a good type of financing for the short term, because the principle of the loan is not paid down, and the outcome  is a lower monthly payment for the homeowner.  That being said, the interest only period doesn’t last forever, and once it expires you can expect your payment to increase due to the fact that you are repaying all of your principle over a shorter period of time.  Basically, the longer your setup your interest only period, the higher your monthly payment will be once it expires.

Balloon Mortgages. At first glance, these types of loans will very much resemble a traditional 30 year fixed rate loan.  The difference being that the term of the loan is almost always much shorter, usually around 5-7 years.  After this time limit is over, the remaining balance must be paid in one single lump sum.  In most cases a borrower will refinance once this point is met, or else pay the entire amount.

Biweekly Mortgages. CLICK HERE to read more about these types of loans.  They can take years off the life of your loan if done correctly.

As always, if you have any questions about the different types of loans, please don’t hesitate to CONTACT US and we will get back to you with an answer ASAP.

- Pate

If you have the pleasure of owning your own home, your loan servicer probably contacts you all the time trying to get  you to change or update your mortgage in some way.  Some of these changes may include refinancing your current loan, taking out a home equity line of credit, or converting your loan into a biweekly mortgage. While the thought of changing your mortgage may seem as a major annoyance, it is definitely worth the time to see if any of these changes could benefit you. So let’s get started.

The folks at the bank claim that switching to a biweekly mortgage can cut the total length of your loan by 5 to 7 years, and at the same time save you thousands of dollars in interest.  Of course this sounds amazing, but is it TRUE?  Is it worth pursuing?  Will the Rangers slump after the all-star break?  Fortunately for you, the former questions are easier to answer.

Overall, the process of converting your existing loan into a biweekly mortgage works quite simply.  In fact, by switching to a biweekly mortgage you aren’t even really changing anything about the terms of your loan, the amount you owe, or any of the stipulations.  Basically, instead of paying your mortgage monthly, you pay half your monthly bill biweekly. By paying the bill every other week, you end up making an extra payment each year!

Now I know you probably hate math, but here’s a relatively simple example that shows how the biweekly program could work for you. We will use a nice round number to begin with.  For example, let’s go ahead and say that your monthly mortgage payment is $1,000. If you make 12 monthly payments, you will have paid $12,000 at the end of the year. Right?

Well, if you pay biweekly, you will end up making a total of 26 payments each year. So in turn, by paying $500 every other week, you will have paid a total of $13,000 by the end of the year. The end result being that you made one extra payment, which will reduce your unpaid principle balance (and interest charges).

So furthermore, switching to a biweekly payment schedule is an effective way to cut years off of your mortgage.  It may not initially seem like very much, but that extra $1,000 a year will eat away at your balance and help you pay it all off early.

Paying down your principle balance is a sound financial move if you can afford it (obviously). In these tough economic times it isn’t always feasible to pay extra each month just to shorten the life of your loan.  But is it necessary to sign up for a biweekly payment plan? And why is the bank asking you to sign up to begin with?

You see, there’s a catch.  Judging by the notion that nothing on Earth is ever free, most banks have made it where to you have to pay a fee to setup this type of payment schedule. It’s usually somewhere between $200-$500, and some banks will also charge you a monthly processing fee.  Other banks will even use a third party company to handle your account if you switch to biweekly.  All this just so you can pay more on your loan.

But don’t worry!  There is a way around all these arbitrary fees! It is still possible to pay down your mortgage just as quickly without having to deal with the bank or pay them extra each month.

Here’s the scoop: Just take the amount of your monthly mortgage payment and divide it by twelve. Using the example above, $1,000 divided by 12 equals $83.33. Now simply add this amount to your payment each month and make sure to make a note that you want it applied to your principal. Believe me, I worked in the loan servicing industry for years, and they will do whatever it takes to not apply the money to your principle.  But anyways…..

By making the 12 payments of $1,083.33, you will have paid off $12,999.96 at the end of the year. Just like that, you’ve gained all of the advantages of the biweekly mortgage without having to pay any fees or service charges!  Hooray!