Available Real Estate Loan Types
So what else is available, besides the thirty year fixed?
There are many kinds of loan out there. Here's a quick overview:
In addition to the thirty year fixed, there are several other varieties of fixed rate loan available, and several that are not. Commonly available are five year fixed, ten year fixed, fifteen year fixed, twenty year fixed, and twenty-five, as well as forty making a comeback.
I tend to avoid them all with my clients, except for the thirty year fixed. You can always pay more if you have more money that month, but you cannot always pay less. The shorter the term, the lower the interest rate should be, as not only are they guaranteeing the rate will not change for a lesser period, but the shorter the term, the more principal you are paying every month and the less risky the loan is. Nonetheless, they are also harder to qualify for because the minimum payment is higher.
For instance, if you have $2000 per month payment that you qualify for, then at 6.5 percent interest rate, here are the amounts you qualify for:
Thirty year fixed rate loans also come in interest only loans, usually for five years.
A paper loans also come in Balloon Loans, with thirty year amortization, where you make payments "as if" if were a thirty year fixed rate loan, but they are due in full after five or seven years (a few ten year balloons exist, and fifteen year balloons are almost exclusively Home Equity Loans). The shorter the balloon period, the lower the rate should be.
A paper loans also come in hybrid ARMs, with thirty year amortization and payoff term, but shorter fixed period. Unlike Balloons, you are welcome to keep them the full thirty years if you want to, but most folks want to refinance or sell before the adjustment begins. One, three, five, seven and ten years are commonly available fixed terms. Once they begin adjusting, they are based upon an underlying index plus a margin above that, and the vast majority of A paper hybrids adjust once per year. For A paper, this is usually the US Treasury rate or the one year LIBOR. COFI, COSI, and MTA are Alt-A negative amortization loans, not A paper, and all three varieties are the same stuff from different outhouses. There are probably a hundred times more negative amortization loans than there should be, because they are so easy for those in search of a quick commission check to sell by the payment when you slap a friendly sounding label like "Pick a pay" on them.
Finally, there are some few A paper that are true ARMS, or so close that they might as well be. Month to month loans, three month loans, and six month loans. Their adjustments are usually on the same basis as hybrid ARMs, and they have thirty year amortizations. Some are even available in interest only.
Sub-prime loans come in more flavors. The most common are fixed for two years, the next most for three. Both come in thirty and forty year amortization periods, as well as interest only. Interest only usually carries a higher rate for the fixed period, because they are riskier loans from the lender's point of view, but the payment is lower. These are usually called 2/28, 2/38, 3/27 and 3/37 loans, for the fixed period and the remaining term thereafter. Interest only variants are all 2/28 or 3/27, and when they begin adjusting. Some sub-prime lenders also offer 5/25 and 7/23 programs. Once they adjust, all of these loans adjust every six months, which is one way to usually tell if you have a sub-prime or A paper hybrid ARMs, as the latter almost always adjust once per year, although a few lenders also have A paper hybrids that adjust at six month intervals.
Sub-prime loans also have thirty and forty year fixed rate loans, with some thirty year fixed rates having an interest only option, usually carrying a quarter of a point higher interest and an interest only period of five years. Nonetheless, the rate spread between sub-prime hybrid and sub-prime fixed is usually larger than the spread between A paper hybrid and A paper fixed. Where you might get the A paper thirty year fixed for one percent above the rate of a 5/1 ARM, the difference between a 3/27 and a 30 year fixed is usually closer to two percent (this is by recent standards. When I initially bought in 1991, I was offered a choice between 5.75 percent 5/1 and 11 percent 30 year fixed)
I tend to like the five year fixed for myself and my A paper clients. It saves a lot in interest, and you've got five years where nothing can change, which is a longer period than most folks go without refinancing, and it's usually only about an eighth percent or so more expensive, interest wise, than the 3/1 while being a quarter percent or so cheaper than a 7/1. For the sub-prime clients, I tend to prefer the 2/28 if I think they'll be A paper at the end of two years, the 5/25 if not and if I can find it (3/27 if I can't). Of course, if you really want to pay the higher rates for a long term fixed rate loan, I may believe you're wasting money, but it's your money to waste, and you're the one making the payments.
Two final types worth covering are the HELOC ("he-lock"), or Home Equity Line Of Credit, and HEL ("heal"), or Home equity Loan. They are usually used as Second Trust Deeds, the second loan on a property. A HELOC is a variable rate interest loan, usually prime plus a margin, and there is often an interest only period. It is a line of credit, and so long as you stay within your credit limit, the initial underwriting covers it. Nobody does fixed rate HELOCs; what they do when you "fix the rate" is fix that part of it you've already taken out and lower the maximum available credit. HELOCs have two phases, a draw period, when you can take more out (up to the approved limit), and a repayment period, when you're repaying what you took. Most folks end up selling or refinancing, however. Home Equity Loans are one time, fixed rate loans. I've seen all sorts, but the most common is a 30 year amortization with a 15 year balloon, although the twenty year fixed is almost as common. You need to refinance, sell, or pay the loan off prior to the end of fifteen years, lest the lender call the note.
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