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Mortgage
Products: The 15 Year FRM
In order to understand the theory behind the fixed rate mortgage,
you have to understand the mindset of the mortgage banker and
the mortgage borrower of thirty or forty years ago. The Great
Depression left a tremendous impression on the minds of this
country, so much so, that one of the popular mortgage products
of the turn of the century, the interest only loan, was shelved,
never to be heard from again. Not until the recent explosion
in real estate prices and the mortgage industries efforts to
accommodate home buyers of all types has there been such mortgage
variety.
The trend after the depression, through post-war America, and really until
the late 1990s was the fixed rate mortgage. That’s the type of mortgage the
bank offered, and the public generally didn’t consider anything else. Why did
so many individuals, as well as banking institutions popularize the fixed rate
mortgage? This loan type, more than any other product available, was a security
blanket for the banker, and the homeowner.
The banker, offering the mortgage loan, was assured of a 20% down payment and
a secure monthly payment with a fixed interest rate that would benefit the
bank. The homeowner received a set monthly payment amount that was affordable,
and a fixed number of years to repay the loan, usually 15, 20, or 30.
This article will discuss the 15 year fixed rate mortgage, and the advantages
offered by the 15 versus the 20 versus the 30 year option. We have really already
established the “why” when it comes to the fixed rate mortgage option in general,
but we need to look at now, the term of the fixed rate mortgage. “Why” would
you choose the 15, or the 20, or the 30? Well it really depends on two factors:
where you are in your life, and what you can afford.
If you happen to be in your 20s, with a lifetime to pay for your home, but
not a lot of income, and two children to raise the 30 year option would get
you the house, with as low a monthly payment as possible. Granted, you will
pay more in interest, but you won’t have to pay out quite as much each month.
If money is tight, a lower payment can mean the difference between buying a
home and renting a home.
If you’re in your mid-to-late thirties, still quite a long way from retirement,
the kids are almost grown, and your monthly income is substantially greater
than it was 10 years ago, the 15 or 20 year mortgage would suit your needs.
Most often, the homeowner will choose the 20 year option, and make principal
payments when affordable.
But let’s say you’re in your late 40s and the amount of time until retirement
is growing ever short; you have your children raised, and your monthly income
is nice to look upon. What option would you take? For most, it is the opportunity
to pay for the home as quickly as possible, thus the 15 year fixed rate mortgage
is the mortgage of choice.
Many homeowners who purchase a home in their mid-to-late
forties are purchasing their second home; some even have
a substantial amount of equity, or down payment
for the home. If this is the case, the 15 year fixed rate mortgage, works
to an even greater advantage, in that the homeowner has
substantial equity, a
lowered monthly payment, and a preset monthly payment amount. The interest
is tax deductible, and they are now secure in the knowledge that their home
will be fully paid out prior to retirement.
When trying to decide which mortgage is the mortgage for your situation,
you need to have a mortgage broker or banker that has an excellent understanding
of your financial status, your goals and objectives for your mortgage purchase,
and your ability to absorb unexpected expenses or change. All of these factors
affect your ability to repay a loan, the choice you will make on a loan,
and
the satisfaction you will have during the servicing of your mortgage loan.
For these reasons, and others, the fixed rate mortgage, especially the 15
year fixed rate mortgage is often the mortgage product of choice, especially
for
the baby boomers, and the forty-something homeowners today.
Mortgage Products: The 20 Year FRM
In order to understand the theory behind the fixed rate mortgage,
you have to understand the mindset of the mortgage banker and
the mortgage borrower of thirty or forty years ago. The Great
Depression left a tremendous impression on the minds of this
country, so much so, that one of the popular mortgage products
of the turn of the century, the interest only loan, was shelved,
never to be heard from again. Not until the recent explosion
in real estate prices and the mortgage industries efforts to
accommodate home buyers of all types has there been such mortgage
variety.
The trend after the depression, through post-war America, and really until
the late 1990s was the fixed rate mortgage. That’s the type of mortgage the
bank offered, and the public generally didn’t consider anything else. Why did
so many individuals, as well as banking institutions popularize the fixed rate
mortgage? This loan type, more than any other product available, was a security
blanket for the banker, and the homeowner.
The banker, offering the mortgage loan, was assured of a 20% down payment and
a secure monthly payment with a fixed interest rate that would benefit the
bank. The homeowner received a set monthly payment amount that was affordable,
and a fixed number of years to repay the loan, usually 15, 20, or 30.
This article will discuss the 20 year fixed rate mortgage, and the advantages
offered by the 20 versus the 15 versus the 30 year option. We have really already
established the “why” when it comes to the fixed rate mortgage option in general,
but we need to look at now, the term of the fixed rate mortgage. “Why” would
you choose the 15, or the 20, or the 30? Well it really depends on two factors:
where you are in your life, and what you can afford.
If you happen to be in your 20s, with a lifetime to pay for your home, but
not a lot of income, and two children to raise the 30 year option would get
you the house, with as low a monthly payment as possible. Granted, you will
pay more in interest, but you won’t have to pay out quite as much each month.
If money is tight, a lower payment can mean the difference between buying a
home and renting a home.
If you’re in your mid-to-late thirties, still quite a long way from retirement,
the kids are almost grown, and your monthly income is substantially greater
than it was 10 years ago, the 15 or 20 year mortgage would suit your needs.
Most often, the homeowner will choose the 20 year option, and make principal
payments when affordable.
But let’s say you’re in your late 40s and the amount of time until retirement
is growing ever short; you have your children raised, and your monthly income
is nice to look upon. What option would you take? For most, it is the opportunity
to pay for the home as quickly as possible, thus the 15 year fixed rate mortgage
is the mortgage of choice.
Many homeowners who purchase a home in their mid-to-late thirties are purchasing
their second home; some even have a substantial amount of equity, or down payment
for the home. If this is the case, the 20 year fixed rate mortgage, works to
an even greater advantage, in that the homeowner has substantial equity, a
low monthly payment, and a preset monthly payment amount. The interest is tax
deductible, and they are now secure in the knowledge that their home will be
fully paid out prior to retirement.
When trying to decide which mortgage is the mortgage for your situation, you
need to have a mortgage broker or banker that has an excellent understanding
of your financial status, your goals and objectives for your mortgage purchase,
and your ability to absorb unexpected expenses or change. All of these factors
affect your ability to repay a loan, the choice you will make on a loan, and
the satisfaction you will have during the servicing of your mortgage loan.
For these reasons, and others, the fixed rate mortgage, especially the 20 year
fixed rate mortgage is often the mortgage product of choice, especially for
the thirty-something homeowners today.
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Mortgage Products: The 30 Year FRM
In order to understand the theory behind the fixed rate
mortgage, you have to understand the mindset of the mortgage
banker and the mortgage borrower of thirty or forty years
ago. The Great Depression left a tremendous impression
on the minds of this country, so much so, that one of the
popular mortgage products of the turn of the century, the
interest only loan, was shelved, never to be heard from
again. Not until the recent explosion in real estate prices
and the mortgage industries efforts to accommodate home
buyers of all types has there been such mortgage variety.
The trend after the depression, through post-war America, and really until
the late 1990s was the fixed rate mortgage. That’s the type of mortgage the
bank offered, and the public generally didn’t consider anything else. Why did
so many individuals, as well as banking institutions popularize the fixed rate
mortgage? This loan type, more than any other product available, was a security
blanket for the banker, and the homeowner.
The banker, offering the mortgage loan, was assured of a 20% down payment and
a secure monthly payment with a fixed interest rate that would benefit the
bank. The homeowner received a set monthly payment amount that was affordable,
and a fixed number of years to repay the loan, usually 15, 20, or 30.
This article will discuss the 30 year fixed rate mortgage, and the advantages
offered by the 15 versus the 20 versus the 30 year option. We have really already
established the “why” when it comes to the fixed rate mortgage option in general,
but we need to look at now, the term of the fixed rate mortgage. “Why” would
you choose the 15, or the 20, or the 30? Well it really depends on two factors:
where you are in your life, and what you can afford.
Let’s say you’re in your late 40s and the amount of time until retirement is
growing ever short; you have your children raised, and your monthly income
is nice to look upon. What option would you take? For most, it is the opportunity
to pay for the home as quickly as possible, thus the 15 year fixed rate mortgage
is the mortgage of choice
If you’re in your mid-to-late thirties, still quite a long way from retirement,
the kids are almost grown, and your monthly income is substantially greater
than it was 10 years ago, the 15 or 20 year mortgage would suit your needs.
Most often, the homeowner will choose the 20 year option, and make principal
payments when affordable.
But, if you happen to be in your 20s, with a lifetime to pay for your home,
not a lot of income, and two children to raise the 30 year option would get
you the house, with as low a monthly payment as possible. Granted, you will
pay more in interest, but you won’t have to pay out quite as much each month.
If money is tight, a lower payment can mean the difference between buying a
home and renting a home.
When trying to decide which mortgage is the mortgage for your situation, you
need to have a mortgage broker or banker that has an excellent understanding
of your financial status, your goals and objectives for your mortgage purchase,
and your ability to absorb unexpected expenses or change. All of these factors
affect your ability to repay a loan, the choice you will make on a loan, and
the satisfaction you will have during the servicing of your mortgage loan.
For these reasons, and others, the fixed rate mortgage, especially the 30 year
fixed rate mortgage is often the mortgage product of choice, especially for
the young person today, fresh from college, with a starter home, a small family,
and a tight budget. Granted, there will be a greater amount of interest paid
out over the life of the loan, but there’s always the opportunity in 10 or
15 years to refinance the loan, and setup bigger payments, with less interest
paid out over the life of the mortgage. After all, the mortgage payment isn’t
the only expense associated with homeownership, and all the expense factors
must be considered; new homeowners certainly do not want a crash course in
credit problems!
Mortgage Products: The Adjustable
Rate Mortgage
You’ve found the home of your dreams, you’re pre-qualified for a loan, and
everything looks absolutely rosy. At first. As you begin to traverse the
actual home appraisal, the loan amortization, your down payment, and all
the dots that must be connected in order to make the dream a reality, you
suddenly realize that you may not be able to afford a payment on the Fixed
Rate Mortgage plan. What other options are available? Well, there’s the Adjustable
Rate Mortgage that is a close first cousin to the Fixed Rate mortgage, just
a little riskier. What advantages does the Adjustable Rate Mortgage option
offer, and what are they drawbacks, if any? This article examines the advantages
and disadvantages, if any, of the Adjustable Rate Mortgage.
The Adjustable Rate Mortgage, or ARM, is a more affordable option for homeowners
who have a fairly tight monthly budget, and who have a need for bigger house,
lower payment. The typical ARM customer wishes to build equity in their home;
however they need the lowest monthly payment possible, for a certain number
of years. The homeowner this program most benefits is the individual who expects
income increases to occur within a few short years, but also has an expanding
family with a need for space.
An ARM works in this way: when you set up your mortgage on an ARM, the interest
rate you have will only be set for a very short period of time, normally only
6,9, or 12 months. At the end of that period, the interest rate will be re-evaluated,
and if the rates have increased based on the prime, your interest rate will
also increase; once again, for a short, set period of time. The benefit derived
from this type of loan, during today’s economy, is that the interest rates
are at an all time low. That equates to big savings for current home buyers,
and homeowners who refinance.
The disadvantage to this type of loan occurs when interest rates begin to rise.
As the rate rises for the lending institution, it also rises for you, the homeowner.
Today, there are spin-offs on the ARM base product, that allow homeowners to
operate under an ARM for a specified number of years, and then the loan converts
to a fixed rate mortgage. There are also the ARMs that offer an interest only
option for a specific number of years, then it converts to a basic ARM for
a specified number of years, and then you have the option to convert the ARM
to an FRM. The home mortgage product market can be very confusing, and quite
frustrating if you don’t take the time to fully research and understand your
mortgage options.
Another great benefit to the ARM, when interest rates are low, is that it allows
you to build equity faster than with a standard fixed rate mortgage. But if
interest rates begin to rise, quickly, your opportunity for building equity
quickly, is greatly diminished, because more of the payment is directed to
the interest on the loan. If you fall into the category of the typical homeowner,
ARMs aren’t as attractive as the fixed rate mortgage; but let’s face it the
typical homeowner category seems to be shrinking.
There are so many options with the ARM basic model, that the ARM option loans
have become more popular than just the basic ARM. The 3,5,7 and 10 year ARMs
that offer interest only options for a set period of time, or that offer 1%
interest for the first month, then there are the ARMs that offer interest only
for 3,5,7, or 10 years, then a standard ARM is established, or a FRM is established.
The mortgage industry has made available so many mortgage choices, that it’s
often very difficult for the average consumer to consider all the options and
make the most wise choice, simply because you need a spreadsheet and calculator
just to compare the options, never mind making a decision about the best options.
All in all, if you are buying a home, and your income level is expected to
increase over the next 10 years, or your expenses are going to drastically
decrease, you would probably benefit from the standard ARM that converts to
a FRM. All the other complicated options still simply do not benefit the average
homeowner today. Now, if you don’t happen to be average, and you have a financial
advisor that can work with you closely, I’d recommend that you consider all
those other options, but only with the assistance of a trained financial analyst.
After all, your home is a purchase you definitely do not want put at risk.
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