Loans For First-Time Buyers
Here Is A List Of Safe Mortgages:
40 and 50 year fixed loans.
- These are fairly new on the market. Their long payment period stretches the
payment out and makes the monthly payment smaller.
30 year fixed - This is
the classic loan and has no risk of interest rate change. The interest-only
version of this loan often has an interest-only period lasting ten years.
20 year and 15 year fixed
- These loans are selected by individuals who want to pay off their mortgage
quickly and can afford the higher payments these loans have. Normally there are
no interest-only versions of these loans. The 15-year fixed loan will normally
have the highest payments of all loan categories. The upside is that the loan
can paid off quickly and the total interest paid out over the lifetime of the
loan will often be hundreds of thousands of dollars less than loans lasting 30
years. The longer the amortization period, the more interest is paid out over
the loan's lifetime. A 50-year fixed loan will have the most interest paid out
over its lifetime of all loans.
10 year, 7 year, and 5 year fixed loans.
- These loans last a total of 30 years with the interest rate being fixed for
the first 5, 7, or 10 years. These loans can either have principal and interest
payments right from the start or have an interest-only payment period during the
first 5 years.
Fixed Rate 2nd Mortgages
- 2nd mortgage can have a fixed rate or a variable rate. 2nd mortgages with
variable rates usually use the Prime Rate as the base right. In a period of
about two years, the Prime Rate jumped from 4.00% to over 8.00%. Borrowers with
variable-rate 2nd mortgages experienced large, steady increases in the monthly
mortgage payments. Rates are still historically low. The Prime Rate could rise
further. Borrowers who take out variable rate 2nd mortgages should take into
consideration that the payment on their 2nd mortgage will increase every time
the Fed raises rates.
1st Mortgage Overview
Any person borrowing money from a bank to purchase a home will have at least
a 1st mortgage attached to their home. Some homeowners will also have a 2nd
mortgage attached to their home in addition to the 1st mortgage. Each mortgage
is recorded at the county recording house at the time that the mortgage was
taken out. The only difference between a 1st mortgage and a 2nd mortgage is that
the 1st mortgage was recorded before the 2nd mortgage. Homeowners take out 2nd
mortgages for one main reason: to avoid paying mortgage insurance on their 1st
mortgage. Anytime a mortgage loan amount exceeds 80% of the value of the
property, the lender will require additional insurance to be paid along with the
payment on that mortgage. This insurance is known as MI (Mortgage Insurance) or
PMI (Private Mortgage Insurance). This payment can sometimes amount to several
hundred dollars per month. Mortgage insurance does not benefit the borrower at
all. It only provides insurance to the lender. To avoid having this mortgage
insurance tacked on to a mortgage payment, the borrower must make sure not to
borrower more than 80% of the total value of the property on any one loan. This
is the reason that people often borrow up to 80% of the property value on the
1st mortgage and borrow any additional money that they need on a 2nd mortgage.
Most home purchasers who do not have at least a 20% down payment of their own
money will have to borrower an 80% 1st mortgage and then borrow what ever else
they need for the purchase on a 2nd mortgage.
Safe 1st mortgages are those that have a rate and payment that is fixed for
at least five years. Most 1st mortgages take 30 years to pay off. In the
beginning of that 30 year period, the loan payment are rate will be fixed for
some period of time. The longer this fixed period is, the safer the loan is. On
average, a first-time buyers stay in their first home for a little more than 4
years. For this reason, most first-time homebuyers should not choose a loan that
has a fixed period of less than five years. At the end of the fixed period, the
loan's interest rate will move to the current market rate. In a worst case
scenario, This could result in a very large jump in monthly payment.
A further risk factor is added by selecting a loan that has interest-only
payments in the beginning. Normally this interest-only period last for five
years. Many loans now have interest-only period of ten years as well. Five years
is considered a safe period for interest-only payments. Even in this case, the
homebuyer should consider whether or not they could afford the payment if they
remain in the home more than five years and the payments become principal and
interest. Interest-only periods of at least five years are not that bad for
homebuyers. They give the home buyer a lot more flexibility in payments. The
borrower can make additional payments toward principal if they want to, but they
don't have to. The interest-only option allows homebuyers to qualify for more
home that a fully-amortized payment (principal and interest) because the payment
2nd Mortgage Overview
2nd mortgages can have a fixed or a variable interest rate. Their total
payment period are normally 20, 25, or 30 years. A fixed rate 2nd mortgage will
have the interest rate fixed for the entire lifetime of the loan. The loan
amount will be fixed as well. These are true fixed rate loans. These fixed 2nd
mortgages are sometimes called HELOANs (Home Equity Loans).
A variable rate 2nd mortgage is usually a line of credit, just like a credit
card. They are sometimes called HELOCs (Home Equity Line of Credit). They
normally last for 20, 25, or 30 years. The interest rate will normally be the
Prime Rate (8.25% at the time of this writing) plus some fixed margin. The
interest rate on one of these types of loans will often be described in terms
such as this, "Prime + 2%." The current interest rate on such a loan would be
10.25% (Prime rate, Which is currently 8.25%, + 2.00%). The trouble with these
type of loans is the the Prime rate goes up every time the Fed raises raises.
The Fed raises a rate that is called the Federal Funding Rate. The Prime Rate
increases lockstep with increases to the Federal Funding Rate. Ina two year
period, the Fed has raised the Prime Rate from 4.00% (Those were the days!) to
over 8.00%. A homeowner with a $100,000 2nd mortgage tied to the Prime Rate saw
their monthly mortgage payment increase by $354 during that time. That is only
the increase on the 2nd mortgage payment. If the first mortgage had begun to
adjust, that payment would have risen as well. It is recommended to get a 2nd
mortgage with a fixed rate if possible.
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