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Mortgage Products 101-California

By Tabitha Naylor

Fixed Rate Mortgages

This mortgage product offers a fixed rate for the life of the loan. This is a good solution if you are planning to stay in your home for a long time, or if you later want to refinance your home at a lower interest rate. Several different terms are available for fixed rate mortgages from 10 to 30 years.

Adjustable Rate Mortgages (ARM)

Adjustable rate mortgages are loans that have adjustable interest rates during the term of the loan. Most often these loans offer lower interest rates for the first several years and then the interest rate is adjusted annually. The term for these loans is generally 30 years. The initial fixed interest rate usually lasts anywhere from 1 month up to 10 years. ARM loans all have a "margin" and an "Index". Margins are generally between 1.75% and 3.5% depending on the index and the amount of money financed relative to the property's value. The index is the financial instrument the loan is tied to like the 1 year Treasury Security, LIBOR (London interbank Offered Rate), Prime, 6-month CD (Certificate of Deposit) rate, or the 11th district cost of funds (COFI). Interest rate adjustments are made by adding the margin to the index and rounding it to the nearest 1/8 of one percent to get the new interest rate. ARMs come with caps that limit how much the rates can adjust.

FHA Loans

The Federal Housing Authority insures these loans against default. These loans are available for single and multi-family family homes. FHA loans require smaller down payments than conventional fixed rate or ARM mortgages. These loans are geared to help first time buyers and those with lower incomes, or lower credit scores to be able to buy a home.

VA Loans

VA loans were designed to help veterans with a loan program that requires no down payment. The Veterans Administration provides insurance to lenders in the event that the veteran defaults on the loan. With the loan guarantee, lenders will offer low interest rates, and flexible terms. The big benefit of a VA loan is the no down payment. Other advantages can include lower closing costs and no prepayment penalties. VA loans are available to military personnel that have served 181 days during peacetime, 90 days during war or to spouses of servicemen or women killed or missing in action.

Fixed/Adjustable Mortgages (Hybrid ARM)

This mortgage blends the features of a fixed mortgage with an adjustable mechanism. Generally the mortgage begins with a low interest rate that remains fixed for a period of 3 to 10 years. After the initial fixed rate period the interest rate becomes adjustable. The rate can be adjusted annually, every 5 or every 10 years throughout the remaining term of the loan. These loans can have terms up to 40 years and you can choose from a variety of different fixed and adjustable rates to create a "customized" loan.

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