Palm Beach Real Estate and Loans

Hello Everyone-

Today's post is about 'Types of Mortgages' - it's important to know which is which when you are purchasing or refinancing your Palm Beach Home.

We all hear about Fixed Rate vs. Adjustable Rate, Option ARM's, Interest-Only, Balloons - but do you know what they are?

Fixed Rate Mortgages- This is the one that people are most familiar with - very easy to understand.  Basically, whatever interest rate you start with, you keep for the life of the loan.  No changes, adjustments, etc.

Adjustable Rate Mortgages (or ARM's)- Becoming much more popular. These loans start with a particular rate that does NOT change for a  period of 2, 3, 5, 7 or even 10 years- after which the rate can increase.  When discussing this type of loan you will hear things like '2/2/6'.  That is short for:

• How much can the rate increase after the initial fixed period?
• How much can the rate increase each period (usually a year) after that?
• What is the cap on the TOTAL increase?

So in this case, after the fixed period is over, your start rate can go up by 2 - every year after that it can increase by another 2 and the total amount of all of the increases can never exceed 6.  For example, if your start rate was 6% it could increase to, but not exceed 12%.

Interest Only- Exactly what it sounds like.  Your monthly payment only covers the interest, it does not contribute to the loan balance.  The idea is to get the lowest monthly payment possible.  In an appreciating market the value of the Home goes up, so even if you never pay down the balance you are still getting equity.

Option ARMS- These require their own post - they can be quite involved and I will go over them tomorrow.

Balloon- Typically associated with lot loans.  Regular monthly payments are made until the term is up - then the entire remaining balance is due OR if you decide to build on the land before the term is up, you can roll the land loan into the home loan and avoid the Balloon payment.

So it comes down to Fixed vs Adjustable.  I suggest you check out this post from Jason Price of Knightlines Mortgage Services, LLC.

In the post he makes the case that the best mortgage IS a fixed rate mortgage - even if it's adjustable!

And he's 100% correct.

Before you think I've slipped a cog, let me explain. 

If you were going to buy a Home and you planned on owning that Home for the rest of your life, you should get a fixed-rate mortgage.  Not to many people do that any more.  Our parents and our grandparents certainly did, but nowadays people tend to move frequently.  So.....

That's where the adjustable rate loans come in.  If you know how long you are going to own a specific property, you'd be better off this way because the INITIAL rate (and the monthly payment) would be lower then if you got a fixed rate loan.  For example: say you were buying a house to fix up and sell in a few years or your company required you to be in a certain area for a few years and then you had to move to another part of the country.  The thing to do would be to get an adjustable rate loan that starts with a FIXED term of 5 years or what ever corresponds to the amount of time you plan on owning the property.

The start rates on the adjustable rate loans are lower than the fixed rate because the powers-that-be are betting that you will need the loan PAST the initial period so that they will make more $ after the rate on the loan increases!

I know that can be a bit confusing, but if you plan things out correctly you will be done with the property BEFORE the loan adjusts.

If that just came across as clear as mud - please don't hesitate to get in touch with me!

Related Posts