Loan Purposes Defined
Purchase
A mortgage used to purchase a home from another individual, builder, trust, or any other entity other than the borrower. The borrower may be purchasing the property as an owner-occupied principal residence, a second home, or for investment purposes.
Refinance
A mortgage used to payoff an existing mortgage or mortgages. A refinance can also be used to satisfy a land contract or a construction loan. The most common reasons for a refinance are to lower interest rates and monthly payments, combine mortgages into one payment, debt consolidation, or to withdraw equity for other personal reasons.
Home Equity or 2nd Mortgage
A home equity loan (also known as a home equity line of credit or "HELOC" or a second mortgage) is a loan that is usually put in place behind an existing first mortgage. It is used primarily to extract equity form a home without having to payoff the existing first mortgage. It is usually for a much lesser amount than the existing first mortgage.
Construction Loan
A construction loan is usually a short term mortgage that is used to finance the construction of a new home. Money is drawn on the mortgage as construction is completed during various phases. Construction loans are usually variable rate mortgages. Interest is paid on the funds as they are being used. Construction loans are usually paid off when construction is completed with an "end loan."
Loan Programs Defined
40/30/25/20/15/10 Year Fixed Rate
By far the most popular mortgage is the
standard fixed rate. The principal and interest payment will be fixed for the entire term
of the loan. This is a good choice for those borrowers who prefer payment stability. Note
that the tax and insurance payments CAN increase as the years go by which can have an
impact on the monthly payment.
Adjustable
Rate or "ARM"
The adjustable rate loan or "ARM"
for short, has become very popular in recent years. The reason is simple. The rate is
lower than on the fixed rate mortgage. At least at the beginning. There's the rub. The
Adjustable can go up or down as the years go by. How often the rate adjusts will be
determined by the type of ARM you get. 1 year Arm's will adjust every year, 3 year Arm's
every three years etc. Fortunately today's adjustable rate loans come with
"caps" which will limit the amount the rate can increase over the term of the
loan. Arm's are not for everybody. Your Boardwalk Loan Officer can explain the different
Arm's available and help you decide if they are right for you.
Interest Only
Interest only loans have gained in popularity in recent years. The benefit to an interest only loan is that you are only required to pay the interest due on the loan per month. This results in a much lower payment. There is a fixed amount of time that you are allowed to pay only interest. Usually anywhere from 1-3-5 years. After that, the loan reverts to a normal "principal and interest" monthly payment. The downside to these loans is that if you are only paying the interest due, then the principal amount of the loan is not being reduced. At some point the principal will have to be repaid.
Balloon
or 7/23 "Two-Step"
The balloon loan is also used by some
borrowers. A balloon will have a lower rate than the going fixed rate. The term
"balloon" is used to describe the way the entire principal balance will become
due at a predetermined time. As the years go by the balloon fills up until it is full and
the entire loan must be paid off. This is usually within 5 or 7 years.
The true "balloon" mortgage forces
you to payoff the entire amount due---even if you aren't able to!! For that reason a new
program was developed. The program is known as a 7/23 or "two-step" mortgage.
With this program you still get the benefit of starting at a lower rate than the
prevailing fixed rate, however at the end of 7 years you will have an option of paying the
loan in full or allowing the loan to adjust 1 time. Hence the name 7/23. It is fixed at
one rate for the first seven years, and then fixed at another rate for the remaining 23
years of the loan. 7+23=30. The 5/25 works the same way except that the term is for 5
years with the loan adjusting to a new rate for the remaining 25 years of the loan.
This program is probably the most misunderstood program of all. The “no-doc” stands for no documentation. This can be misleading. This does NOT mean that a mortgage company will hand over the money with no questions asked or without looking at your credit report. In fact, your credit report will be looked at very closely when you apply for a “no-doc”. This program was designed for self employed people who have complicated or cumbersome tax returns which they would rather not provide to a mortgage company. Mortgage companies created the” no-doc” to satisfy these types of borrowers. With a strong credit history and substantial down payment, mortgage companies will not require income to be verified with tax returns. Over the years many types of these programs have been created for many different types of situations and borrowers. Consult with your Loan Officer to see if a “no-doc” is right for you.
Subprime
"Subprime" loans are made to borrowers who do not fit in the normal underwriting guidelines for "conventional" financing. Generally these loans are seen as riskier to lenders, so the terms that are offered are not as attractive. The interest rate is usually higher than the going market rate and the loans tend to be adjustable. They may also have prepayment penalties. However, these loans are also very useful. They allow people who otherwise would not have chance to obtain a mortgage to obtain one. It allows these borrowers to own a home and establish good credit. Once a borrower is able to qualify for a "normal" loan they will generally refinance off the subprime loan and obtain more favorable terms.