Loan Descriptions
Below, you will see a brief description of the many types of mortgage loans.
Some of them are not used as much as others. We are available to help with any
questions that you might have. Just call us at: 847-794-5000, fax: 847-794-5001,
or email us at
Info@integramtg.com |
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30 Year Fixed Rate Loan
This type of loan has 360 monthly payments that remain the same for the entire
30 year period after which time the loan is paid in full. The monthly payment is
based on an interest rate which does not change over the term of the loan (hence
the term “fixed rate”) |
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Interest Only Loan
A mortgage is “interest only” if the monthly mortgage payment does not include
any repayment of the principal for some period. The payment consists of interest
only. During that period the loan balance remains unchanged. For example, if a
30-year fixed-rate loan of $100,000 at 8.5% is interest only, the payment is
.085/12 times $100,000, or $708.34. Otherwise, the payment would be $768.92.
This is the “fully amortizing payment”-the payment that, if maintained over the
term of the loan, will pay it off completely. The interest only loan thus
reduces the monthly payment by 7.9%. A loan that is interest-only for the full
time would not amortize. The loan balance would be the same at term as it was at
the outset. Back in the twenties, loans of this type were the norm. Borrowers
typically refinanced at term, which worked fine so long as the house didn’t lose
value and the borrower didn’t lose his job. But the depression of the thirties
caused a large proportion of these loans to go into foreclosure. Lenders stopped
writing them and have never brought them back. They want loans that eventually
amortize. Hence, the interest only loans of today are interest only for a
specified period, such as 5 years. At the end of that period, the payment is
raised to the fully amortizing level. In such case, the new payment will be
larger than it would have been if it had been fully amortizing at the outset.
Suppose, for example, the interest only period on the loan described above is 5
years. Then the payment starting in month 61 would be $805.23. To reduce the
payment by $60.58 for the first 5 years, the borrower would pay an additional
$36.31 for the next 25. The longer the interest only period, the larger the new
payment will be when the interest only period ends. If the same loan is interest
only for 10 years, for example, the fully amortizing payment beginning in month
121 is $867.83. To reduce the payment by $60.58 for the first 10 years, the
borrower would pay an additional $98.91 for the next 20. Interest only mortgages
are for borrowers who want lower initial payment, and have some confidence that
they will be able to deal with a payment increase in the future. |
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7 Year Balloon Loan
This type of loan is similar to the 5 Year Balloon loan except for the fact that
the term of the loan is 7 years as opposed to 5 years and the refinance option
at the end of the term is for an additional 23 years as opposed to 25 years. As
with the 5 Year Balloon loan, the index is typically the fixed interest rate
offered at that time by the Federal National Mortgage Association (60 day
mandatory yield rate) and is calculated by adding a specified amount to the
index (typically .625% - 1.25%). Also, as with the 5 Year Balloon loan, the
borrower must meet specified conditions to be able to take advantage of the loan
extension option and the interest rate must not have risen by more than 5.00%
over the initial rate. |
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B/C Credit Loan
These types of loans are available to borrowers who have or have had credit
problems such as being late on or defaulting on the repayment of loans or credit
cards. Although such loans are available as fixed rate or adjustable rate
mortgage loans, the interest rate and/or costs associated with such loans are
generally higher than loans available to borrowers who do not have a history of
credit issues to reflect the fact that the risk associated with such loans is
generally higher. Borrowers who do not have a history of credit issues are said
to have “A” credit. Those with a history of credit issues are said to have “B”
credit or “C” credit depending on the severity of the credit issues. |
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Second Home Loan
This type of loan is used to purchase or refinance a property other than a
borrower’s principal residence. In most instances, such a property is a
borrower’s vacation home (or “second home”). Provided that the property is not
strictly an investment property, the interest rate and costs charged on such
loans will generally be the same as those available on loans used to purchase or
refinance a borrower’s principal residence. |
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No Income/No Asset Verification Loan
This type of loan is similar to a No Income Verification Loan and a No Asset
Verification Loan except it is used by borrowers who do not wish to or are
unable to verify their income and their assets. Once again, the interest rate
and/or costs for such loans may be slightly higher than normal to reflect the
higher degree of risk involved in loaning to borrowers without verifying their
income or assets. Such risk is often offset, to some degree, by borrowers who
have a significant history of paying loans of a similar type as this one being
sought or who are borrowing only a small percentage of a property’s value. |
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Government Loan
This type of loan is guaranteed by a federal agency such as the Veterans
Administration of the Federal Housing Administration of by a State agency such
as a State housing authority. As a result, such loans are typically offered at
reduced interest rates and have less stringent loan qualification guidelines.
Such loans, however, are generally targeted to a specific group of people and
contain income, purchase price or other eligibility requirements. |
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Construction Loan
This type of loan is typically used to finance the construction of a home. It
may or may not also include the purchase of the land upon which the home is to
be built. Unlike a typical mortgage loan where the entire amount of the loan is
disbursed to the borrower at the time the loan transaction is consummated, a
construction loan typically involves a series of disbursements which are linked
to a construction schedule. Some construction loans have fixed interest rates,
others have variable interest rates. In addition, some construction loans
automatically convert to a regular mortgage (referred to as “permanent”
financing) once construction has been completed, while others require another
loan transaction to take place so the borrower can payoff the construction loan
and obtain permanent financing. |
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1 Year Adjustable Rate Mortgage (ARM)
This type of loan is similar to the 6 month ARM except for the fact that the
adjustment period is every 12 months (one year) as opposed to every 6 months. In
addition, the adjustment cap on a 1 year ARM is typically 2% as opposed to 1%.
The lifetime cap is typically 6%. The index is typically the One Year Treasury
Security index and the margin is typically 2.5% - 3.0%. |
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3/1 Adjustable Rate Mortgage (ARM)
This type of loan has monthly payments that are based on a 30 year repayment
schedule and the interest rate remains fixed for the first 36 months (three
years). After that time the interest rate (and, therefore, the monthly payments)
may change every 12 months (one year). This is referred to as the “adjustment
period.” The new rate is based upon fluctuations in an index (typically the One
Year Treasury Security) and is calculated by adding a specified amount to the
index. The amount that is added to the index is called the “margin” (typically
2.5% - 3%). For example, if the index equals 5% at the time of adjustment and
the margin equals 2.75%, the new interest rate would be 7.75%. However, this
type of loan program usually has limits on how much the interest rate can change
(either up or down) at each adjustment date, compared with the interest rate
being charged before the new adjustment is made. Typically, the limit is 2% and
is referred to as an “adjustment cap.” There is also a limit as to how much the
interest rate can change (either up or down) from the initial interest rate over
the entire life of the loan (typically 6%) and this is referred to as a
“lifetime cap.” The monthly payment changes, as needed, at each adjustment
period, to reflect the adjusted rate. |
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5/1 Adjustable Rate Mortgage (ARM)
This type of loan is similar to the 3/1 ARM except for the fact that the
interest rate remains fixed for the first 60 months (5 years) as opposed to the
first 36 months. After that time the interest rate (and, therefore, the monthly
payments) may change every 12 months (1 year). As with a 3/1 ARM, the index is
typically the One Year Treasury Security index, the margin is typically 2.5% -
3%, the adjustment cap is typically 2% and the lifetime cap is typically 6%. |
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