Fixed
Rate Mortgages
Fixed
Rate Mortgages
This is the most common type of mortgage program where your monthly payments
for interest and principal never change. Property taxes and homeowners insurance
may increase, but generally your monthly payments will be very stable.
Fixed rate mortgages are available for terms
ranging from 40 years down to 10 years.
Fixed rate fully amortizing loans have two
distinct features. First, the interest rate remains fixed
for the life of the loan. Secondly, the payment remains level
for the life of the loan and is structured to repay the loan
in full at the end of the loan term. The most common fixed
rate loans are 15 year and 30 year mortgages.
Early on in the loan, a large percentage
of the monthly payment is used for paying the interest. As
time goes on and the loan is paid down, more of the monthly
payment is applied toward the outstanding principal. Depending
on interest rates, a typical 30 year fixed rate mortgage
takes 22.5 years of level payments to pay half of the original
loan amount.
There are now a variety of fixed rate mortgages
to choose from in addition to a traditional fixed-rate, fixed-payment
mortgage:
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Balloon Payment
This loan looks and feels the same as a traditional
fixed-rate, fixed-payment mortgage, except that there is
a balloon payment due at the end of the loan term. For
example, the loan may be amortized over 30 years with a fixed
rate, however, there may be a balloon payment due at the
end of the fifth year.
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Fixed Rate / Interest Only
This loan has a fixed interest rate for the entire
term of the loan; however, an initial period of time calls
for interest only payments. This keeps the payments
low in the early years and maintains the same fixed rate
throughout the term of the loan. For example, the loan
may be a 30 year fixed rate loan where the first 10 years
have minimum interest only payments (in effect, even though
it is only one loan it is split into two segments: (1) 10
years interest only, and (2) 20 years fully amortizing, all
at the same interest rate).
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Fixed Rate Loans With A Temporary
Buydown
A temporary buydown gives a borrower the benefit of
a fixed rate loan with a low initial payment that goes up methodically
for a specified period of time. The most common buydown
is the 2-1 buydown. In the past, for a buyer to secure a 2-1
buydown they would pay 3 points above current market points
in order to pay a below market interest rate during the first
two years of the loan. At the end of the two years they
would then pay the market rate at the time the loan closed
for the remaining term of the loan.
As an example, if the current market rate
for a conforming fixed rate loan is 8.5% at a cost of 1.5
points, the buydown gives the borrower a first year rate
of 6.50%, a second year rate of 7.50% and a third through
30th year rate of 8.50% and the cost would be 4.5 points. Buydown
costs were usually paid for by a transferring company because
of the high points associated with them.
In today's market, mortgage companies have
designed variations of the old buydown programs. Instead
of charging higher points to the buyer in the beginning the
note rate is increased to cover the cost of the buydown.
As an example, if the current rate for a
conforming fixed rate loan is 8.50% at a cost of 1.5 points,
the buydown would give the buyer a first year rate of 7.25%,
a second year rate of 8.25% and a third through 30th year
rate of 9.25%, or a three-quarter point higher note rate
than the current market and the cost would remain at 1.5
points.
Another common buydown is the 3-2-1 buydown
which works much in the same ways as the 2-1 buydown, with
the exception of the starting interest rate being 3% below
the note rate. Another variation is the flex-fixed
buydown programs that increase at six month interval rather
than annual intervals.
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Graduated Payment Mortgages (GPMs)
The GPM is another alternative to the conventional
adjustable rate mortgage. Unlike an ARM, GPMs have a
fixed note rate and payment schedule. With a GPM the
payments are usually fixed for one year at a time. Each
year for three or five years the payments graduate at 7.5%
- 12.5% of the previous years payment.
GPMs are available in 30 year and 15 year
amortization, and for both conforming and jumbo loans. With
the graduated payments and a fixed note rate, GPMs have scheduled
negative amortization of approximately 10% - 12% of the loan
amount depending on the note rate. The higher the note
rate the larger degree of negative amortization. This
compares to the possible negative amortization of a monthly
adjusting ARM of 10% of the loan amount. Both loans give
the consumer the ability to pay the additional principal
and avoid the negative amortization. In contrast, the
GPM has a fixed payment schedule so the additional principal
payments reduce the term of the loan
The scheduled negative amortization on a
GPM differs depending on the amortization schedule, the note
rate and the payment increases of the loan. GPM loans
with 7.5% annual payment increases offer the lowest qualifying
rate but the largest amount of negative amortization.
On a loan of $150,000, with a 30 year amortization
and a note rate of 10.50% with 12.5% annual payment increases,
the negative amortization continues for 60 months. The
effective qualifying rate is 5.75% and the negative amortization
is 11.34% (approximately $17,010).
The note rate of a GPM is traditionally
.5% to .75% higher than the note rate of a straight fixed
rate mortgage. The higher note rate and scheduled negative
amortization of the GPM makes the cost of the mortgage more
expensive to the borrower in the long run. In addition, the
borrower’s monthly payment can increase by as much
as 50% by the final payment adjustment.
The lower qualifying rate of the GPM can
help borrowers maximize their purchasing power, and can be
useful in a market with rapid appreciation. In markets
where appreciation is moderate, should a borrower need to
move or otherwise sell their home during the scheduled negative
amortization period they could find themselves in an unpleasant
situation
Contact your Freedom Financial mortgage
professional today to discuss your specific loan situation.
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