 |
Sell
Mortgage,
Real
Estate Investment,
Seller
Financing,
|
|
|
Place/View Listings: Sell Mortgage • Mortgage Wanted • Get Mortgage • Note Brokers • Mortgage Brokers • Lenders Bookstore |
Site Index | |
Conventional Mortgage TypesThis article was written in May 2004. Obviously mortgage interest rates fluctuate on a day to day basis, so please don't expect the rates quotes below to be applicable when you read this article. However the theory behind the rate differences will still apply. Rates are a little higher than the recent lows, however are still low compared to average historic rates. A conventional 30-year fixed mortgage, that is to say 10% or more down payment, good credit and normal debt ratios, is about 6.5%, up from 5.5% in March, 2004. Historically, rates of 8% or more are typical, so this still isn't too bad a deal. But remember, one reason for the low interest rates is the low inflation rates. High inflation helps borrowers, especially long term borrowers, as they are paying off the debt with money worth less and less every year. To learn more about why mortgage interest rates move.
But there are alternative mortgage types at lower rates -- nearly as low as 4% (in May 2004) on some deals.
But are these deals truly better, or just "fools gold". There is always a trade-off. Each mortgage type serves borrowers only in specific situations. Here's a comparison of each type of mortgage loan, along with the rates as at May 2004.
15-Year mortgage
15-year conventional mortgages now average about 6%, up from about 5% in March. You can lock in a rate for the life of the mortgage at about 1/2% less than the equivalent 30-year mortgage.
The disadvantage is that although the interest rate is lower, monthly payments are higher than for 30-year mortgages of the same amount. That's because the principal -- the amount borrowed -- has to be paid back in 15 rather than 30 years. This increases the principal portion of the payment.
See comparison example below for $100,000 mortgage.
To check this out for other interest rates, download our mortgage interest rate comparison Excel ® spreadsheet. It is a self-extracting compressed file.
If you can handle the higher payment, the 15-year mortgage will save you a lot in interest over the life of the loan, because you pay interest only half as long.
However, you could save almost as much interest by making extra principal payments on a 30-year mortgage loan to pay it off ahead of schedule. That way, you wouldn't be required to make the bigger payments, as you would with a 15-year loan, so you won't be caught in a squeeze if you have an expensive month. Remembering always that CREDIT CARD loans are nearly always FAR more expensive than mortgage loans and are not tax-deductible. The one-year adjustable-rate mortgage or ARM.
One-year adjustable-rate mortgages are now (in May 2004) at an average of 4.25% for the first year. They were at 3.6% in March 2004. They typically run about 2% less than 30-year mortgages for the first year.
The catch: The rate will adjust every 12 months, usually by adding 2.75 percentage points to the rate paid by one-year U.S. Treasury securities. So when prevailing rates rise, ARM rates do, too. Usually, ARMs are capped and can go up or down no more than 2 percentage points in a year, or a total of 6 points during the life of the loan.
That means an ARM issued today at 4.25% could someday charge as much as 10.25%.
Obviously, ARMs cost less than 30-year loans for the first 24 months. And because the first year's payments are low, borrowers can qualify for bigger loans.
But ARMs generally must offer bigger up-front savings than today's to be good long-term bets. They are more attractive when the short-term interest rates that determine adjustments are likely to fall over coming years. Because most economists think rates will rise, one-year ARMs are not very appealing right now. But please be aware that NO economist truly knows the future path of interest rates. Any more than they know the future prices of shares on the stock market.
Hybrid ARMS
Hybrid ARMs offer a starting rate for three, five, seven or 10 years, then go to an annual adjustment the same as one-year ARMs. Obviously, the appeal is the longer period for the cheap up-front deal.
A hybrid might be good if you think the short-term rates used for adjustments will come back down by the time the adjustments begin.
And a hybrid can save you money if
you don't intend to stay in your home for more than a few years.
Average rates as at May 2004 are 4.5% on three-year hybrids, 5.1% for five years, 5.5% for seven years, and 5.8% for 10 years. As you can see, the longer you want the rate to be fixed, the higher is the initial rate.
That makes the three- and five-year hybrids pretty appealing. But most experts recommend choosing a 15-year fixed mortgage at 6% rather than seven- and 10-year hybrids. But if you intend to move in the next 5 to 7 years, this is obviously not the case.
Balloon mortgages
With a balloon mortgage, the payments are calculated over an amortization period of perhaps 15 or 30 years. But the remaining principal balance of the mortgage is payable in full after a fixed, agreed period, often 5, 7 or 10 years. Common with seller financing and commercial loans.
• | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Free info on mortgage investments, private mortgages, hard money mortgages, discounted mortgages, seller financing.
Mortgages, owner financing, deeds of trusts, discounted mortgages, seller financed mortgage, hard money mortgage Web sites design hosted for note brokers note and cashflow buyers web site design hosting Web site design hosting for mortgage brokers, mortgage broker web site design | |||||||||||||||||||