TYPES OF LOAN PRODUCTS

There are 3 basic types of loan programs: FIXED RATE PRODUCTS, Adjustable Rate Products and Hybrid Rate Products (combination of both). These basic loan types are further divided into Conforming (conform to volumes of underwriting guidelines from FANNIE MAE and FREDDIE MAC and Non-Conforming/or Jumbo loan programs.

At the present time, maximum Conforming loan amount is $322,700 from these quasi-governmental lenders. Each year FANNIE MAE and FREDDIE MAC meet in November to determine new guidelines for the following year. One of the items discussed is maximum Conforming loan amount for the next year.

Loan amounts that exceed FANNIE MAE and FREDDIE MAC are considered Jumbo loan products. Most lender use similar criteria or guidelines on Jumbo products, but loan amounts can be increased to $2,000,000.

 

FIXED RATE PRODUCTS

The most common type of mortgage is a fixed monthly payment for principal and interest (P& I) that never changes for the term of the loan. Only the property taxes and hazard insurance (fire insurance) will change. If you have homeowner association dues (HOA payment) or mortgage insurance (MI) these may also increase.

Fixed rate mortgage programs are available for 40 years, 30 years, 20 years, 15 years, and 10 year. The most common fixed rate loans are 30 year and 15 year terms. Fixed rate loans fully amortize at term and have two distinctive features. First, the interest rate remains the same for the life of loan term and secondly the payment remains level for the life of loan term.

A very large percentage of your monthly payment is interest (95%) in the first few years of amortization. Approximately 2/3 through the term life for your loan the loan payment becomes half principal and half interest. As the loan term nears the end the reverse happens as the percentage of your payment increases to where 95% is principal. A professional tax attorney or consultant can help you decide if the fixed rate product is right for you. Many borrowers today need the Federal Tax write-off of the interest payment, but want the comfort of a stable monthly payment. This is why Hybrid Rate Products have become popular in the past few years and refinancing more prevalent every 5-10 years.

 

ADJUSTABLE RATE PRODUCTS

An Adjustable Rate Mortgage (ARM) is a loan that can fluctuate in interest rate during the term of the loan. These mortgage loans begin with an interest rate 2-3% lower than a fixed rate loan product. There are also Negative Amortized Loans (Neg Am’s) with very attractive start rates that increase in calculated interest rate faster than actual monthly payment. In other words, you may owe more money when refinancing years later, than when you originally took out the loan. Ask the Loan Consultants at EagleLending.com about this type of loan product. The can explain both the "pros" and "cons". This loan product has its place for short-term periods and first time homebuyers to get started.

ARM’s are based on an index which lenders use for intra-banking activities. The index interest rate is used as a basis for calculating your interest rate during the term of your loan. As the index rises and falls over the course of your loan, so will the interest on your loan. The monthly adjustment for your actual monthly payment will change depending on the lenders loan program. These adjustments can be every 3 to 12 months, but the lender is to provide you with a minimum 30-day notice of the change and the amount. The following is a list of the most popular loan indexes:

 

	U.S. Federal Reserve (Cost of Funds) by District
	LIBOR (London Intra-Banking Organizational Rate)
	1 Year U.S. Treasury Bill
	6 month U.S. Treasury Bill
	CDs (Certificate of Deposit)

	You’re a business manager or salesman that moves every 3-7 years
	You’re a first time buyer and hope to be moving in 3-5 years
	You’ll be retiring in 7-10 years and moving.
	You need cash out for the children’s college fund now and will probably want a smaller home after you are retired.