Choosing a Loan Type

"Okay now I know the basics; I know where to go, but also I'm receiving all this publicity in the mail talking about one and a quarter percent about terms, about so many options but then I'm confused and now like I don't know if this one is the best option or the other one or I now receive from so many banks, so many institutions. Okay, that's good, now that we know okay where you can go for these things, we have got to know what different programs are out there and what you should be aware of. Okay, the main programs out there are your fixed rate loans. This is a big one right now and it is what is segwin or what is mostly occupied in the market place. Fixed rate loans are just as they sound. They are fixed rate, now that is typically your thirty year fixed rate loan or your fifteen year fixed rate loan. With a fixed rate loan, like a thirty year fixed rate loan, okay, that means that your interest rate is not going to change for thirty years, the rate is fixed or the whole duration of the loan. And with this one you are going to be making monthly payments into your principle balance to get it paid off over the term of thirty years. At the end of thirty years, you will have no loan and you will own the house free and clear. Okay, so that is the first one, that is called fixed rate. On a fixed rate there are also options as with almost every loan out there. You can have what is called an Interest Only option or IO. An Interest Only option says for the first preselected amount of time, sometimes it is five years, sometimes it is ten years, you have the option, you are not required to but you have the option to only pay interest or you can pay Principle and Interest which is paying towards your loan balance. Okay, that will continue until the end of the term, like I said five years or ten years. At that time you are required to pay Principle and Interest, so they take whatever the remaining balance is on your loan and amortize it over the term that is left. Does that make since? Okay, so that is going on about fixed rate loans and Interest Only. Now the second loan program I am going to talk about is not too traditional for first mortgage but you will see a lot more commonly in second mortgages and that is called a Balloon Loan. Okay, so we have talked about the fixed rate loan, like I said that is a thirty year fixed or a fifteen year fixed traditionally, you can get twenty and twenty five years but those are your most typical. The next one we are going to talk about is a Balloon Loan. Now a Balloon Loan is not very common with first mortgages although they can be bought and found, typically they are available on a second mortgage. Now the way a Balloon Loan works is they are amortized over thirty years which means that their payment breakdown is over thirty years. So your monthly payment what you are contributing is broken out as if it is going to take you thirty years to pay it off, but then they have a balloon portion which means after a certain term, the balance whatever you have left owing is due. Typically on a second they have a thirty due in fifteen, which means it is a thirty year amortization but in fifteen years, you have to pay off whatever is left owing. So your loan term is only fifteen years long. Now, the next loan that we are going to talk about or loan program we are going to talk about are called Adjustable Rate Loans or ARMS. Now Adjustable Rate Loans are the main reason or one of the main reasons we are having the issues we are having right now in the mortgage marketplace. The way an Adjustable Rate Loan works is it is amortized like I said, the payment schedule or breakdown, is over typically a thirty year term, so it is a thirty year amortized loan. But, the fixed portion of your interest rate is only for a certain term, say five years, ten years, seven years, it varies, but we will take a typical of five year ARM. Your amortization, your thirty year amortization is broken down based on your interest rate. But that interest rate will change after five years. At which time your payment will change. Now the way they do this change, they have what is called a margin and an index. So they will take an index like the libor index, you can find these in the newspaper in the financial section. They will take the index like the libor index and they will say okay we are going to use that index plus a margin and that is what the bank sets for how they are going to adjust your interest rate. A lot of times they will do like a two point seven-five margin on the index. So they will take whatever the libor is at and add two point seven-five percent to that and that is how they determine what your rate is going to be. This has created a lot of problems because people got into these loans because their interest rates were typically lower, so they go into them to keep their payments down so that they could afford the monthly payment. Well when the market has shifted the way it has and they couldn't refinance out of those, they got stuck in a loan that started adjusting and their payment started going up and then they couldn't afford it anymore and that is why the foreclosures are happening and that is why all of this stuff have been happening in the secondary market with the sub prime companies and all of that. Okay, so those are ARMS or Adjustable Rate Mortgages."