There's more to a mortgage than how much you qualify to borrow. A wide selection of mortgages are available to you nowadays. You need to think about your long-term plans and financial goals when trying to decide what kind of mortgage financing you should choose.

If, for example, you think you may have to relocate in the next 1 - 3  years, then an adjustable-rate mortgage may be your best choice. However, if you plan on keeping the house for more than 5 years, a fixed-rate mortgage may be a better choice.

There are literally dozens of different loan programs, but the most common fall into two basic types: Fixed Rate and Adjustable Rate . They are described below. You may click on any of the underlined terms you don't recognize, and it will take you to the appropriate section in our Mortgage Glossary for an explanation. The Back button on your browser will return you to this page.

General Information

Conforming or Jumbo?  The government pitches in
There are two quasi-governmental finance agencies, The Federal National Mortgage Association (FNMA, or "Fannie Mae") and the Federal Home Loan Mortgage Corporation (FHLMC, or "Freddie Mac"), whose only purpose is to ensure the nationwide availability for funds for home mortgages, thereby enabling a higher percentage of home ownership. They do this by buying mortgages from mortgage bankers, which replenishes the money supply and encourages more home-loan lending. Their current limit on mortgages is $417,000(as of January 1, 2006) and increases yearly . A conforming loan is a first mortgage up to that amount, and a jumbo loan is a first mortgage greater than that amount.

Since mortgages of $417,000 and less can be sold to a low-cost source, they will naturally cost less to you the borrower. Conforming loans, particularly fixed-rate loans, offer lower interest rates than Jumbo loans.

Conforming Loan Limits  (All Areas except Alaska & Hawaii)
One - Family Home	$417,000
Two - Family Home	$533,850
Three - Family Home	$645,300
Four - Family Home	$801,950

 

Free Lunch  There ain't no such thing.
You have seen advertisements for loans starting as low as 4%, haven't you? You have seen the same for "no-point, no fee" loans. Or how about adjustable-rate loans that are convertible to a fixed-rate loan? Are these great deals? They might be, depending on your circumstances and needs. But please ask us questions. There are fabulous features to every loan, but no loan has all the best features. (If it did, everyone would get that one loan.) What is right for you? Please take the time to understand these programs, what they do and what they don't offer, and you'll be able to help us help you better.

Cost/Interest Rate  The tradeoff.
The incidental costs of a loan (appraisal, title insurance, escrow fees, processing) will be about the same no matter which program you choose.  Points, the money the broker and lender earn for putting the loan together can vary even with the same loan program, depending on the starting rate you choose. For instance, if you get a new loan at 8% interest and one point, you might be able to get that same loan at 7.75% interest and two points. (One point equals 1% of the loan amount. Points can be further broken down into origination fee and discount points.) When we use the term cost below, we mean the total of points and incidental costs.

Zero Point, Zero Fee Loans
On all of the mortgage loans offered to consumers, you must choose that happy medium between paying points and securing the lowest interest possible. You may choose a lower interest rate by accepting higher points or choose a higher interest rate and pay less points. The relationship varies daily, so it is not always a consistent ratio but typically for every 1 point you pay in points it will change the interest rate by 1/4%

If you wish to pay less in up-front fees, we can offer you that too, by increasing the interest rate. At some point the lender will actually pay part or all of our fees; if they pay all of our fees, it is a no-points loan.

With some but not all programs, when the rate gets high enough the "rebate," as it is called, from the lender may get high enough to pay all of your closing costs. Thus, a "zero-point, zero-fee loan." On a 30-year fixed-rate mortgage, this might be at an interest rate 1.25% to 2% higher than the same loan at full cost plus two points.

Advantages: No costs at all up front, though we do collect appraisal and credit-report fees up front and refund them in escrow.

Disadvantages: Higher interest rate on the loan.

When it is a good idea:

• (In case of a purchase) When you have very little to put down, but your income is sufficient.
• (In case of a refinance) When you do not have the cash to pay the costs up front, or the equity to finance them.
• If you think you will keep the loan only a year or so. In general, it takes about two years on most loans to recapture the up-front costs of a two-point loan, give or take a few months at most.

For a more in-depth look at Zero Point/Zero Fee loans... click here

 

Fixed-Rate Loans

Plain Vanilla
This is the easiest mortgage  loan to understand. You borrow money, you pay it back, the same payment every month for 30 years (or 15 years, or 40 years) until it's paid off. The interest rate never changes.

Advantage: You will always know what your payment is and it is not susceptible to increasing interest rates (as is an ARM)..

Disadvantage: This is typically the loan with the highest interest rate.

When it is a good idea:

• When you know you will stay in the house for a long time.
• When level payments are important to you for financial planning.
• If you are insecure about your job future.
• If you might want to rent the home in the near future but live in the home now.
• Most Importantly: When interest rates are at a low cycle!

There are two major variations on the fixed-rate loan: Balloon and Buydown.

Balloon
A balloon is a fixed-rate loan amortized typically over 30 years, but it is due and payable in full, typically in five years or seven years. Some have an extension option at the end of the term, where you may have the option to extend it for the remaining 23 or 25 years, but the rate is reset to current market conditions, there is typically a small cost, and you must have a good payment record.

Advantage: Lower cost than a conventional fixed mortgage.

Disadvantage: At the end of the balloon period, you must either sell the home, refinance it, or, if the loan is extendible, accept whatever terms the lender happens to offer at that time.

When it is a good idea:

• If you need a lower rate than a fixed rate will allow in order to qualify.
• If you intend to own the home less than the term of the balloon and will thus sell it anyway.

Buydown
A buydown is a fixed-rate loan where you pay extra money up front in points in exchange for a lower rate the first one or two years. Typically the rate is dropped 2% the first year, 1% the second year, and then goes to the full rate. So, if the note rate were 8%, the interest rate the first year would be 6%, the second year 7%, and the third year and every year thereafter, 8%. The up-front points will cost about 2.5% more. Thus, if you would have paid 2 points up front, you would instead pay 4.5.

Advantages: Initial lower rate than a fixed-rate mortgage, and although your payments will increase, they will do so by a given, known amount.

Disadvantage: Very costly up front.

When it is a good idea:

• When fixed rates are at a low cycle, but you can not qualify for the note rate.
• If you are purchasing a home, when the seller is paying for closing costs .
• If you know your income will rise in the next year or two and can cover the increased payments.

 Adjustable Rate Loans (ARMs)

How The Adjustment Works
A variable-rate loan (or adjustable-rate mortgage, ARM) is one in which the interest rate can be adjusted periodically by the bank. The frequency with which it adjusts is called the adjustment period.

Your loan comes with an index and margin. The index is a published interest rate index typically set by market conditions. A well-known example is the prime rate, though it is rare for that to be used for mortgage loans. The most common is the One-Year T-Bill, the interest rate earned on treasury notes issued by the U.S. Government with a maturity date of one year. These securities sell on the open market and the rate can change from moment to moment, though generally it moves in very small increments in the short run. Other indexes commonly used are the Cost-of-Funds Index (COFI), which tends to be the most stable, and the London Interbank Offered Rate (LIBOR), which tends to be the most volatile. The margin is the amount over the index used to set your rate. A typical margin is between 2.5 and 3.0, meaning that your rate is set at the index (using 5.5% as an example) plus your margin (using 2.75% as an example) or 8.25%. Just prior to your adjustment date, the lender will look at the index called for in your contract, add your margin, and send you a letter telling you what your new rate will be.

Important Notes:
These loans often start with a "teaser rate," meaning that the start rate is below the fully indexed rate -- that indicated by adding your index and margin together. The teaser rate allows you to make lower payments until your first adjustment date. However, if you start with a teaser rate, your loan will almost invariably go up when it adjusts. This is fine, if you anticipate it and can plan for it.

1-Year ARMs
The most common adjustable-rate loan is adjusted annually, though those which adjust every six months are popular, too. These loans typically have an adjustment cap of 2% per year or 1% each six months, meaning the interest rate cannot go up or down more than 2% (or 1%), and a lifetime cap of 6% over the start rate, meaning the rate can never exceed 6% more than the initial rate when you took out the loan. If rates stay where they are when you take this loan out, this loan will always be less expensive than a fixed-rate loan taken at the same time.

Advantages: The initial cost and interest rate will be much lower for this loan than it will be for a fixed-rate loan, and the rate may stay lower than your fixed rate would have been indefinitely.

Disadvantage: The rate can vary in an unpredictable manner, making planning difficult at best.

When it is a good idea:

• If you do not intend to keep this loan for very long.
• If you think your income will improve in the next year or two and want a low start rate for now.
• If you believe interest rates will stay low for as long as you intend to keep this loan.

Hybrid ARMs
These loans are adjustable, but the first adjustment date is extended, to three, five, seven or even ten years. The longer the "fixed" period, of course, the higher the initial rate. These loans typically will adjust annually after the first adjustment, have a 2% adjustment cap and a 6% lifetime cap, but not always so be sure to ask. In all other respects, they are similar to one-year ARMS.

Advantages: Lower rate than fixed-rate loans, but longer fixed period than a one-year ARM to give you some time before they adjust.

Disadvantages : At times the cost advantage over fixed-rate loans, particularly when the fixed period is seven or ten years, is so small it is not worth it. The adjustable rate, once it starts, is usually higher than a one-year ARM and almost always more than a monthly ARM.

When it is a good idea:

• If you have very little down payment and do not wish to get a fixed-rate mortgage. This gives you time before your loan adjusts.
• If you want to gamble a little, but not heavily, on interest rates not going up.

3 Year Adjustable Rate Mortgage
This is a 30 year loan in which the rate (and therefore your monthly payment) changes every 3 years. Like the 1 Year Adjustable Rate Mortgage, your new rate is calculated based on a predetermined formula.

This loan, while risky, is safer than the 1 Year Adjustable Rate Mortgage only because it does not adjust as frequently. This loan is right for you if you are willing to take on a moderate amount of interest rate risk in exchange for a lower initial rate which cannot change for three years. This loan could be right for you if you expect to move or refinance in about three years.

This loan may also be right for you if you wish to qualify for more money now based on your current income and you expect your income to increase over the next three years to cover any adjustment in your monthly payments.

Finally, this loan may be right for you if you plan to stay in your home longer than three years, and your income will be able to absorb any increases in your monthly payment.

5 Year Adjustable Rate Mortgage
This is a 30 year loan in which the rate (and therefore your monthly payment) changes every 5 years.

This loan is a nice compromise between shorter term Adjustable Rate Mortgages and Fixed Rate programs. You should choose this program if you expect to stay in your current home beyond the initial five years, you still wish to keep your payments relatively low, and you are willing to accept a small amount of interest rate risk in exchange for this benefit. Do not take this program if you are concerned that your income may not support increases in your monthly payment.

3/1 Adjustable Rate Mortgage
This 30 year loan offers a fixed interest rate for the first three years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 27 years of the loan. This loan has become quite popular in the last two years and should be considered by all those seeking to minimize monthly payments while accepting a certain amount of risk.

This loan is right for you if you wish to maximize the amount of loan you qualify for and expect to remain in this home for more than 3 years. This loan is generally the least expensive way to fix your monthly payment for the first three years of your loan. After that, the loan behaves like a 1 Year ARM with all of its risks and rewards. Do not take this loan if you are concerned that your income in three years may not cover your monthly payment after your first adjustment.

5/1 Adjustable Rate Mortgage
This 30 year loan offers a fixed interest rate for the first five years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 25 years of the loan. This loan has a longer initial fixed period than the 3/1 Adjustable.

This loan may be for you if you fit the profile for the 3/1 Adjustable Mortgage but wish to trade off a higher initial rate for the security of a longer initial fixed period. If you are certain you will only remain in this home for less than the initial 5 years, consider the 5/25 Balloon Mortgage instead.

7/1 Adjustable Rate Mortgage
This 30 year loan offers a fixed interest rate for the first seven years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 23 years of the loan.

This loan is right for you if you plan to remain in this home at least the initial seven years, but consider it likely that you may wish to remain longer. If you are certain you will only remain in this home for less than the initial seven years, consider the 7/23 Balloon Mortgage instead.

10/1 Adjustable Rate Mortgage
This 30 year loan offers a fixed interest rate for the first ten years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 20 years of the loan.

This loan is right for you if you plan to remain in this home at least the initial ten years, but consider it likely that you may wish to remain longer. Select this loan if you wish to have a long period of fixed monthly payments, but still wish to enjoy some savings over the 30 Year Fixed Rate Mortgage.

5/25 Balloon Mortgage
Although your monthly payment is calculated as if you will pay off the loan over 30 years, this loan requires that you completely pay your remaining balance (a significant percentage of your original loan amount) in a single payment after 5 years. No, the lender does not expect you to win the lottery. The idea of this loan is that you will sell your home or refinance on or before your balloon payment date.

This loan is the perfect program for temporarily relocated workers or others who are certain they will not stay in their new home beyond the 5 year period. Unlike the 5 Year Adjustable, 5/1 Adjustable, and 5/25 Two-Step programs which also offer a fixed rate for 5 years, the borrower often enjoys a lower interest rate for this program because he is not obliging the lender to extend credit to him beyond the initial fixed period.

Note: Some balloon programs offer the borrower a Conditional Right to Reset which effectively provides for an extension beyond the initial fixed period.

7/23 Balloon Mortgage
A longer version of the 5/25 Balloon Mortgage. Your monthly payment is calculated based on a 30 year amortization schedule, but you are required to pay off your outstanding balance after 7 years.

This loan is for you if you are certain you will be moving or refinancing on or before the 7 year deadline, and you wish to have the security of a fixed payment amount during this period.

Note: Some balloon programs offer the borrower a Conditional Right to Reset which effectively provides for an extension beyond the initial fixed period.

5/25 Two-Step Mortgage
This 30 year mortgage offers an initial five year fixed rate. After this initial period expires, the rate is adjusted once for the remaining 25 years of the loan.

Select this loan if you expect to remain in the home for at least five years, but consider it a possibility that you could remain much longer. Since there is uncertainty about how much your payment will change after year five, you should only consider this program if you expect to be able to afford your post-adjustment monthly payment. If you are certain that you will be moving or refinancing within five years, you should consider the 5/25 Balloon program, but only if there is a significant monthly savings.

Note: This Loan is typically available for conforming loan amounts only.

7/23 Two-Step Mortgage
This 30 year mortgage offers an initial seven year fixed rate. After this initial period expires, the rate is adjusted once for the remaining 23 years of the loan.

Select this loan if you expect to remain in the home for at least seven years, but consider it a possibility that you could remain much longer and you are comfortable with the prospect of a future adjustment. If you are certain that you will be moving or refinancing within seven years, you should consider the 7/23 Balloon program, but only if there is a significant monthly savings.

Note:  This Loan is typically available for conforming loan amounts only

2/28 Adjustable Rate Mortgage (Also called a 2 Year Fixed)
This program is a 30 year adjustable program, except that the first adjustment does not occur until 2 years into the loan. At this point, adjustments are typically made every 6 months. Ask your lender about the frequency of adjustments, since some 2/28 loans adjust every year.

This program is primarily offered for consumers with less-than-perfect credit. The intention of this loan is to allow the borrower 2 years to improve his or her credit rating, at which point the borrower may refinance at a better rate.

3/27 Adjustable Rate Mortgage (Also called a 3 Year Fixed)
Like the 2/28 Adjustable Rate Mortgage, except that the initial fixed period is 3 years instead of 2 years.

Monthly Adjustable
These are the loans that can have outrageously low start rates. The interest rate on these loans adjusts every month, although your payment may not. Often, you will be given a payment option with your loan statement: You may pay either the new payment amount to fully amortize your loan over 30 years, or you may continue to pay the old payment, even though it may not exactly amortize the loan. Some of these loans allow negative amortization. This means that you may even be allowed to pay less than the interest charges each month, but the unpaid interest is then added to the loan balance, and the amount you owe goes up! A negative-amortization loan can be great; it gives you the option of retaining a smaller payment without going into default on the loan. It may, however, be difficult to borrow more money in the form of a second mortgage. If you think this loan is for you, please discuss it carefully with your loan counselor.

Advantages: These loans typically have lower start rates and lower margins than other adjustables.

Disadvantages: You will never have certainty from one month to the next what your payment will be, though they typically do not vary a great deal in one month.

When it is a good idea:

• If you are very secure in your job, think rates will stay low, and plan on making at least the fully amortized payment each month, this loan may be the best deal for you.

For more in-depth look at Adjustable Rate Mortgages... click here

Shoreline Mortgage Corporation
4000 Hollywood Boulevard
Hollywood, Florida 33021
Toll Free (888) 353-1558
Phone (954) 966-1313
   Fax (954) 966-3606
E-Mail  Loans@Shorelinemtg.com

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