Mortgage Options

When buying a home or refinancing an existing mortgage, there are a variety of financing options to choose from.

• Fixed Rate Mortgage
• Adjustable Rate Mortgage
• Interest Only Option
• Lot & Construction Loans

Fixed Rate Mortgage

A Fixed-Rate Mortgage features payments that remain constant throughout the life of the home loan.  The interest rate and other terms are fixed and do not change.  Among other factors, the interest rate on this type of mortgage does not change but it is important to consider the term of the loan.  The shorter the term, the faster equity can be built.  In contrast, the longer the term, the lower monthly payments will be. To determine if a Fixed Rate Mortgage is right for you, please consider the pros and cons:

Pros

• Consistent interest rate and monthly payments.
• Choice of term options, including 10, 15, 20, 25, and 30-year options.
• A good choice for people who will own their home long term.
• A good choice for people who want to minimize risk.

Cons

• May not be a good choice when expected time of home ownership is short.
• Higher rate compared to Adjustable Rate Mortgage, because the lender guarantees the rate longer.
• May not be a good choice for clients with a tolerance for risk, who believe rates will be lower in the future.

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Adjustable Rate Mortgage (ARM)

An Adjustable Rate Mortgage is a home loan that is subject to periodic changes in interest rate.  To determine if an Adjustable Rate Mortgage is right for you, consider the pros and cons:

Pros

• Lower interest rate and monthly payments at inception.
• Great flexibility in start rate guarantees.
• A good choice for people who will own their home short term.
• A good choice for clients with a high tolerance for risk and who believe rates will be lower in the future.
• May provide the temporary help needed to afford a more expensive home.

Cons

• Interest rate can increase over time.
• Not a good choice when expected home ownership is long term.
• Not a good choice for clients with a low tolerance for risk.
• Not a good choice if the client believes rates will be significantly higher after start period and the client expects to own the property at that time.

During the Start Rate period, the rate on an Adjustable Rate Mortgage is guaranteed.  In most cases, the shorter the Start Rate period, the lower the rate.  The longer the Start Rate is guaranteed, the higher the rate.  After this period, the rate can rise or descend, depending on the prevailing market.

Start Rate for an Adjustable Rate Mortgage can be guaranteed for:

• Less than one year
• One year
• Two years
• Three years
• Five years
• Seven years
• Ten years

Any change in interest rate for an Adjustable Rate Mortgage is usually subject to Caps.  Caps limit how much and when the rate can increase or decrease. 

An Initial Cap limits how much the rate can change immediately after the Start Rate period. 

A Periodic Cap limits how much the rate can change after the Initial Cap rate adjustment, and any future adjustments. 

A Lifetime Cap limits the change over the Start Rate, during the life of the loan.

Here are three common Cap examples:

1. 5/2/5 (Initial/Periodic/Lifetime) The Initial rate change is capped at 5%, the Periodic adjustments are capped at 2%, and the total Lifetime Cap is 5% from the Start Rate.
2. 2/6 (Initial/Lifetime) The Initial Rate change is capped at 2% and the total Lifetime Cap is 6% from the Start Rate.  There is no Periodic Cap.
3. 6 (Lifetime) There are no Initial or Periodic Caps.  The Lifetime Cap is 6% from the Start Rate.

The Interest Only Option is a feature available with either a Fixed Rate or Adjustable Rate Mortgage.  As the name implies, the borrower pays only the interest portion of the home loan.  The principal is not reduced unless the borrower pays an extra amount to reduce it. 

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Interest Only Option

The Interest Only Option is a feature available with either Fixed Rate or ARM mortgages.  As the name implies, the borrower pays only the interest portion of the home loan.  The principal is not reduced unless the borrower pays an extra amount to reduce it. 

Pros

• Lower monthly payment.
• Not amortized, so borrower can pay principal down to lower the monthly payments.

Cons

• Set payments do not reduce the home loan’s principal amount.

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Lot & Construction Loans

Whether you are buying land or need to finance new construction, On Q Financial can help with flexible options that meet your needs.

Lot Loan

A Lot Loan is a short-term loan used to finance land that will be built on at a later date.

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Construction Loan

A Construction Loan is a short-term loan accessed to fund the cost of construction.  Lenders advance funds at various times as the work progresses.  Rates, terms, and conditions can vary greatly from lender to lender. 

Lenders base the loan amount on home’s value two ways:

1. Loan-to-Value: The value is based on the finished house.  An appraiser will estimate the value of the house, based on the construction plans.  If the costs are less then the value, the lender will still base the lending decision on the value. 

   Loan-to-Value Calculator

   Loan-to-Value formula: Appraised Value x Loan-to-Value Guideline = Maximum Loan Amount

2. Loan-to-Cost: The cost to build is the sum of the lot cost/value and construction cost.  Since lenders have minimums for the appraised value, an appraisal is still required. 

   Loan to Cost Calculator

   Loan-to-Cost formula: (Lot + Construction Cost) x Loan to Cost Guideline = Maximum Loan Amount

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