A bank loan is a source of money, tied to financial indexes, that one can tap into if certain qualifying stipulations are met. The most common bank loans available for residential, commercial and business purposes are the fixed, the adjustable rate (ARM), interest only and the jumbo. Depending on your needs as a borrower, one of these loan types will suit you well.
Fixed Rate
As its name implies, the fixed-rate mortgage carries the same interest rate throughout the life of the loan, be it 15 or 30 years and is used by nearly 75 percent of home-mortgage shoppers in the U.S. Many borrowers feel this is the best loan type because it's predictable and easy to understand. Lenders view fixed-rate loans as more risky because of their higher monthly payment and long lifespan. This causes fixed loans to carry a higher initial interest rate than compared to adjustable-rate mortgages. A fixed-rate loan is ideal for borrowers who intend on keeping a home or building for many years.
Adjustable Rate
Although this loan type has received a bad rap in recent years because of the number of borrowers defaulting on them, adjustable rate mortgages (ARMs) are a useful tool for savvy borrowers who want a lower monthly payment than a conventional fixed-rate mortgage offers. Typically, ARMs offer interest rates below the market norm in the first few years of the loan. When the rate begins to increase, its amount is tied to the U.S. financial market's prime interest rate. An ARM can increase a loan applicant's buying power because a lower rate facilitates a larger loan amount. It is also a popular tool for those who know they will move or refinance within a few years. Uncertainty is the trade-off for the lower interest rate and flexibility. As the prime index fluctuates so does interest rate. Many lenders offer ARMs because the loans generate revenue in the short-term.
Interest Only
Ideal for borrowers who do not intend to pay off a mortgage, the "I.O." or interest-only loan works by requiring the borrower to only pay the loan's interest for the first thre, five or 10 years, for example. After that predetermined time frame, a portion of each monthly payment is allocated to pay down the principal. By only paying interest, the borrower reduces the monthly payment but will have to settle for a .250 percent to .375 percent higher interest rate as the bank considers the lack of reduction in the loan's principal as risky. Borrowers who do not intend to hold onto the property for a long time are attracted to I.O.s
Jumbo
Jumbo loans have a loan amount that exceeds the accepted level as set by governmental mortgage-backing agencies Fannie Mae and Freddie Mac. For example, if you're attempting to purchase a home for $1 million and you need a loan of $850,000, you are automatically considered a jumbo-loan borrower. This loan type is not chosen, it's required for large loans because of the increased risk that comes with larger loans. Jumbo loans have nothing to do with overall home value or with the borrower's qualifying factors such as income or assets -- it simply comes down to the loan amount.
Specifically, a jumbo or "non-conforming" loan in 2010 was defined as any loan that exceeded $417,000. In some 200 counties across the U.S., that number was increased to $729,750 to better accommodate higher home values in those specific areas.
Because of the higher loan amount, again perceived by banks as more risky, jumbo 30-year fixed-loan rates are generally .750 percent to 1.250 percent higher than a conventional 30-year fixed loan. With that said, a borrower can expect a jumbo to work just like a regular 30-year fixed. Therefore, it's a safe and predictable loan that carries a slightly higher interest rate than a conventional mortgage.
0 comments:
Post a Comment