The first mortgage option is a 15-year, fixed rate mortgage. This mortgage type maintains a steady interest rate for the fifteen-year term of the loan and requires the homebuyer to make equal monthly payments until the loan is amortized (Zillow.com, n.d.[b]). Because the term of this loan is short, the monthly mortgage payment will be higher than with a longer-term loan as the principal must be paid off in a shorter amount of time. The interest rate associated with a mortgage varies by lending institution, homebuyer’s credit score, loan term, location of home, among other variables (Geffner, 2009). For the purposes of this analysis, we will assume that the homebuyer has qualified for Bank of America’s 15-year, fixed rate mortgage interest rate …show more content…
This mortgage type has a thirty-year term with a steady interest rate for the first ten years of the loan; after this initial period, the interest rate will adjust yearly for the remaining twenty years of the loan (Zillow.com, n.d.[c]). This adjustment will be based on “the fluctuation of an index” (Bank of America, n.d.[b]) in addition to the margin of the lending institution- “a fixed percentage rate that you add to your index rate to obtain the fully indexed rate for an adjustable-rate mortgage” (Zillow.com, n.d.[c]). Banks will place caps on the yearly adjustment of the interest rate as well as over the life of the loan (Bank of America, n.d.[b]). Because the interest rate fluctuates during the life of the loan, the homebuyer’s monthly payment will fluctuate as well. For the sake of this analysis, we will assume that the homebuyer has qualified for Bank of America’s initial 10/1 ARM interest rate of 3.5% (Bank of America, n.d.[b]), with 0.1% increases every year thereafter. It should be noted however, that an ARM’s interest rate does not necessarily increase every year; the interest rate may decrease, causing a homebuyer’s monthly payment to decrease in some cases (The Federal Reserve Board, n.d., p. …show more content…
With an initial interest rate of 3.5%, a homebuyer’s monthly principal/interest payment during the first ten years is $772.36. The actual monthly payment will be, as with the 15-year fixed rate mortgage, increased by the monthly escrow payments of homeowner’s insurance and property taxes- making the actual monthly payment during the first ten years $1,246.36. Under the assumption that the interest rate would increase by 0.1% every year after the initial 10-year period, the homebuyer’s principal/interest payment increases from the aforementioned $772.36, to $850.15, with their total monthly payment increasing from $1,246.36 to $1,324.21. Again, the proportion of the principal/interest payment directed towards interest charges is the periodic interest rate of the period multiplied by the previous month’s ending principal balance. The remainder of the principal/interest payment is then applied to the principal balance. Under the given terms, the homebuyer will have paid an initial $43,000 down payment, $172,000 in principal payments and $118,539.50 in interest charges for a total expenditure on a $215,000 listed home of
The company’s products include different mortgage and loan types, with four main products in total. Quicken Loans offers both adjustable rate (ARM) mortgages and fixed rate mortgages. Adjustable rate mortgages are adjusted periodically and are determined on changes in a specific index. Interest rate caps are usually included on ARM loans, and these interests following the trends of one’s specific overall interest rates. Fixed rate mortgage loans are usually in fifteen or thirty year terms, with the borrower agreeing on a fixed payment each month that does not fluctuate. Conventional loans are loans not secured by a government sponsored entity, such as the FHA or VA. Conventional loans conform to the Freddie Mac and Fannie Mae product lines. FHA loans are backed by the Federal Housing and Urban Development Administration. These are the most popular loans for first time home buyers, attending to allow housing to become more affordable. They are limited to specific home types and home locations. Quicken Loans jumbo mortgage loans are always larger than the limits set by the Freddie Mac and Fannie Mae agencies each January, with the agencies purchasing the underlying securities from mortgage originators. Currently, the jumbo loans are offered at
Numerous homeowners avoided adjustable-rate mortgages, commonly called ARMs, at the time of and after the recession, but based on an analysis from the trade publication Inside Mortgage Finance, the amount of adjustable-rate mortgage sources elevated beyond 40 percent from the first quarter of this year to the second, which in turn was a significant leap even accounting for seasonality.
If you have a 15-year mortgage, you are locked into a certain payment that will be higher than a 30-year mortgage of the same interest rate. But with a 30-year mortgage, you still have the option of paying more if you choose to. In fact, there are investment experts who claim that making a double payment early in a 30-year mortgage is a good, long-term investment. The point to remember is that you are less likely to be able to do this with a 15-year mortgage. The payments will simply be too high.
Today 's suite of adjustable rate programs include a number of structural options but the standard market acceptable versions all follow the same basic format. The interest rate is fixed for a period of time and subsequently adjusted annually during the ensuing years. Although the primary consideration other than interest rate is the length of time to the first adjustment, the criteria effecting how the adjustments are made is also an important to understanding the impact on future mortgage payments.
As of October of 2014, the average rate for a fifteen year fixed-rate mortgage has dipped to its lowest level since June 2013, at 3.08%, according to Freddie Mac’s weekly survey. This is a tenth of a percentage point lower than less than a month ago, and down from 3.36% earlier this month. Rates for 30-year loans have also decreased 0.05 percent at 3.92%. For existing homeowners with mortgages only a few years old, borrowers can switch their existing thirty year loans for a new 15-year loan at the current rate. These homeowners would be able to afford slightly higher monthly mortgages but save more money long term in interest by cutting the term of the loan in half.
As a consumer planning for a home purchase, one of the major decisions that you will have to make is deciding what type of mortgage will best meet your needs. In today's mortgage market, the types of mortgages available to you can be divided into two categories, adjustable and fixed interest rate mortgages.
One of the options available to the consumer in mortgages is the variable rate mortgage. In variable mortgage, the interest rate is geared to the prime rate. When the prime rate is low, your mortgage interest rate is also low. However, when the interest rates start going up, the mortgage interest rate also goes up. Quite often, even when the mortgage rate has gone up, the monthly payment remains the same, but the bank may adjust the payment once or twice a year to take into account the rising interest rates. How often this adjustment will take place is stated in the mortgage documents.
Most customers seeking a mortgage with US Bank prefer a fixed-rate mortgage. The term means the interest rate does not change over the lifetime of the loan period. Borrowers always know how much the monthly payment will be. The time frame of the loan will be either be a fifteen year loan or a thirty year loan. A thirty year loan will have lower ,monthly payments, but since the time frame of the loan is longer, borrowers will pay more in interest over the lifetime of the loan. Banks look at credit scores and other factors to determine interest rates before issuing a loan. Borrowers with a low credit rating can often quality for a home using an FHA loan.
Going beyond qualifications for borrowers, the products lenders have available need to be evaluated. Adjustable rate mortgages provide a borrower with a low initial interest rate in the initial period, which is an advantage over a fixed rate loan. Disadvantages of an adjustable rate mortgage however, have become obvious over the past years. People are allowed to purchase homes that are larger and more expensive than what they could afford with a fixed rate loan. Interest rate increases may increase depending on the state of the economy, and monthly payments will most likely increase beyond the borrowers ability to pay (Bank of America). Therefore, these loans need to be evaluated in their terms and conditions regarding the borrower. With such an unstable loan, it would be smart for the lender to avoid selling these loans to high risk consumers. However, during the “hay day” (2003-2005) of sub-prime lending, these loans were often sold to consumers with FICO scores below 620 (NPR). So lenders themselves are at fault for
The relationship between a homeowner’s outstanding mortgage debt and the market price of the property.
Borrowers are individuals with different circumstances, which has always made the risk premium a challenging factor for lenders to assess. To minimize their risks, lenders put mortgage applications through a process known as underwriting. During the underwriting process, the lender verifies the applicant 's employment history, income and down payment. The borrower 's debts will be evaluated to ensure that all payments, including the mortgage payment, can be met. The underwriting process also includes a careful evaluation of the borrower 's credit history.
Many sub-prime mortgage programs have been designed and intended to be relatively short-term financing vehicles. Adjustable-rate mortgages (ARMs) with either a two-year, fixed interest rate period (2/28 ARMs) or a three-year, fixed interest rate period (3/27 ARMs) are common sub-prime mortgages. They are non-conforming mortgages which do not meet the standards for
A mortgage is a form of security against a loan given in advance. The mortgage loan is a term loan secured by the mortgaged property. There are residential mortgages and commercial mortgages. Residential mortgages are housing loans and typically are taken over a 30 year period, but can be for shorter periods. Some homeowners take them out for a 15 year period to pay less in interest costs. Commercial mortgages are usually a period of less than 10 years. Mortgage loans include either fixed or variable interest rates. The fixed interest rates will typically reset every two to three years. The variable interest rates fluctuate at the interest rates fluctuate with the economy.
default is countered by the bank with a higher interest rate. These mortgage loans, granted at variable
Fixed rate / variable rate | Amortization / interest only | Mortgage Term Options | Down payment options