Fixed Adjustable Balloon Graduated Payment Step-Up HELOC Stand Alone Seconds

Prime Loans:

A prime loan, also known as a “conventional” loan refers to a borrower that typically carries a lower risk of default. Prime loans usually carry the most advantageous terms and rates for a borrower. Some borrowers with perfect credit may not be candidates for prime loans because of other risk factors associated with the borrower.

Sub-prime Loans:

Sub-prime loans are also known as “BC” or “non-conventional” loans. “BC”, contrary to popular belief, does not mean “bad credit”. Sub-prime loans are any loan that falls out of conventional guidelines for any reason. In today’s marketplace a number of different lenders exist that have developed their own risk models to accommodate for the myriad of borrowers and situations that may arise. Many sub-prime loans accommodate a borrowers unique or challenged situation to achieve mortgage financing.

A fixed rate mortgage is simply a fixed interest rate for the whole term of the loan. These loans are best for borrowers who need to control the payments on their mortgage throughout the life of the loan. Fixed rate loans are a good means of helping a borrower hedge themselves against rising interest rates and inflation.

Balloon Mortgages carry a fixed rate for a certain term. At the End of the term the remaining outstanding balance is due and payable to the lender. Traditionally Balloon loans are amortized over 30 years. The Balloon is traditionally not suggested unless a borrower is intending to be in the property for a short time and needs to take advantage of the lower interest rates offered by the mortgage.

HELOCS and Seconds are essentially the same type of mortgage. HELOCS are generally not tied to a certain loan amount instead are initially given at a certain dollar figure and the borrower is allowed to use the funds just like a line of credit.  A Second generally follows an amortization schedule and is repaid over a certain time period and sometimes requires a balloon payment.

Adjustable Rate Mortgages (ARM) are popular because they generally start with a lower interest rate, so monthly payments are lower. This allows borrowers to qualify for a larger mortgage than would be changing market interest rates.

ARMS sometimes have a lower initial interest rate than fixed-rate mortgages. The difference in cost may allow borrower’s to qualify for a more expensive home.

ARMS can be a good choice when interest rates are high. If interest rates are high when borrowers get the mortgage but drop over the initial period or any subsequent adjustment period, the monthly payment may decrease. Conversely this may work against a borrower in a lower interest rate environment with rising rates.

An ARM that has its initial adjustment after the 2nd, 3rd, 5th or 7th year can save you money if you plan to stay in the house for those exact periods of time.

All ARM interest rate adjustments are based on a published market index. Some frequently used indexes include Certificates of Deposit, U.S. Treasury Bills, Cost-of-Funds, and LIBOR.

ARMS have defined adjustment periods that determine how frequently the interest rate can change. The initial period before the first adjustment can be short (1 or 3 years) or quite long (7 or 10 years). After the initial period the interest rate on most ARMS adjusts every year.

Once the initial period is up, the interest rate can increase or decrease based on an index plus a certain percentage, known as the margin. ARMS have rate caps, or ceilings and floors, on how much the interest rate can increase, and in some cases, decrease.

There are caps on the amount of the interest rate increase or decrease on the first change date after the initial period, on each subsequent periodic adjustment and over the life of the loan. For example, a 5/1 ARM may have a 5% cap on the change in the interest rate on the first change date (after the 5 year initial period), a 2% cap on the change in the interest rate each year after the first change date, and a 5% cap on the increase (but not the decrease) over the term of the loan.

Be sure to look at what the maximum monthly payment could be with the ARM you are considering.  Be sure you can afford it in a changing rate environment.

Even though the interest rate on an ARM may increase over the term of your mortgage, it may still be a good choice if a borrower expects his/her income will increase over the life of the loan because initial payments are lower than with a fixed-rate mortgage. When the interest rate and payments increase, you will still be able to make the payments from your higher income.

Borrowers may be required to have private mortgage insurance (PMI) if the down payment is less than 20%. Private mortgage insurance protects the lender if the mortgage goes into default.

The type of documentation you can provide will often directly correlate to the final interest rate or term the borrower receives. Documentation refers to the homebuyer providing sufficient evidence to verify their income and assets. Lenders offer a number of solutions to fit a borrower’s situation.

• Full Documentation: This assumes that the borrower can fully document income and employment for the last two years. The borrowers assets and employment will be verified on these types of loans. This can either be done with W2’s, tax returns or a combination of both. Self employed borrowers are generally required to sign IRS form 4506, which allows lenders to order a duplicate copy of the borrower(s) income taxes. Also, self-employed borrowers will often need a letter from a certified public accountant to prove self-employment for the previous two years. It also depends upon how much documentation the lender requires on a case-by-case basis. Often we have seen that borrowers with good credit need only to provide one year’s worth of documents to secure a full-doc loan.

• Stated Income: Designed primarily for self-employed borrowers who cannot verify their income under normal provisions, as would a wage-earning borrower. The asset and income are “stated” by the borrower, but not verified by the lender. Many lenders offer a W-2 (wage earner) stated program with a minimum credit score requirement. Several Alt-A lenders offer 100% purchase and refinance programs under stated documentation with a sufficient credit score.

• No Income, No Asset Verification: Borrowers leave income and asset information blank resulting in no ratios being calculated, and no assets to be verified.  With some creative financing through Midwest Capital Mortgage you might be surprised at how little documentation is required in these cases.

• 24 Months Bank Statements: Treated as a full documentation loan with certain lenders. Deposits recorded on the past 24 months bank statements are totaled and divided to derive gross monthly income.
  
  
• No Documentation (No-Doc): Borrowers do not have to provide any documentation as it pertains to income or assets. In most cases lenders meticulously scrutinize appraisals to verify market value.