Different types of loan programs part 1

There are so many different loan programs to choose from it can often be quite overwhelming for the average borrower. To help you in the decision process we’ll be discussing a variety of loan programs over the next couple of weeks to help you, at least understand some of them and how they work. This is in no way a complete and all inclusive list of loan programs available, but it will cover the most popular ones out there.

Option Loans or Pick-a-Payment loans: Option loans generally follow these guidelines: you will have four different payment options each month, you can pay the P&I (principle and interest) as if it were a 15 year fixed loan (the highest payment), P&I as if a 30 year fixed (second highest), pay interest only (the second lowest payment) or make a payment of the initial start rate (the lowest payment option, though the start rate is only fixed for a short time). This loan can be very useful if you have irregular income, for example $10,000 income one month and $2,000 the next, or perhaps you are expecting a windfall in the near future. These loans are also very popular right now especially in California where housing prices are so high.

Bottom line: Because of the flexibility of the monthly payments these can be great loans, if used properly. Borrowers need to go in knowing though that these can become negative amortization* loans if they are only every able to make the lowest payment, not paying the full interest due on the loan.

[*Negative Amortization: Occurs when loan payments are not enough to cover the amount of interest due for that payment period. The unpaid interest is calculated and added to the total loan amount, increasing the outstanding balance.]

ARM’s (Adjustable Rate Mortgages): Adjustable Rate Mortgages are just what the name implies; they will be fixed for a specific time period and then will adjust according to the terms after that initial time frame. For instance a 7/1 ARM is fixed for the first 7 years but then once a year, every year after, the rate will adjust according to the market. They are generally available in 1, 3, 5, 7 and 10 year terms. There are safety measures set in place though, there will be a set “margin” of how much the rate can change either up or down each time it adjusts, and there will be a “life-time cap” which is the highest the rate can go over the life of the loan. This loan is often used by real estate investors.

Bottom line: A good choice if you know that you will be selling or refinancing the property before the fixed period is over. But if you plan on owning the property past the fixed period, it is a gamble.

~More loan programs will be covered in my next article~

If you would like to know more regarding any loan type, whether I discussed it here or not, please email me your questions.
HannahPadilla@aol.com