Adjustable Rate Loans

What is an Adjustable Rate Loan?

What is an Adjustable Rate Loan?

When you borrow money by taking out a loan, you will be paying back this loan with interest.

It is the interest that drives how expensive a loan is. There are other fees involved, but the interest rate determines the bulk of the cost of a loan. The higher the interest rate, the higher the costs you will be paying.

In a fixed rate loan, the interest rate is the same for the entire length of the loan. You will be paying the same monthly payment every month.

➤ Related article: What is a Fixed Rate Loan?  (Comment: Make this line clickable to Fixed Rate Loan article when publishing.)

So what is an adjustable rate loan? What is an adjustable rate mortgage?

An adjustable rate loan which is commonly referred to as ARM for adjustable rate mortgage is a type of mortgage where the interest rate on the outstanding balance varies throughout the life of the loan. However, the initial interest rate is fixed for a period of time and after that it resets periodically based on the type of ARM you select. The two most common ARM adjustments periods are yearly and monthly.

Essentially, an ARM simply means the interest rate may change throughout the life of the loan which consequently means your monthly payment can go up or down.

ARM’s are usually not a highly recommended loan option because they do have increased risk. Remember if the interest rate adjusts higher then so will your monthly payment.

That being said at times it can be a perfect option for homebuyer(s) who expect to own the house they are purchasing for only a few years.

For instance, if you know you are only going to live in the house for only five years maximum, and then plan to move to another place after that, a 5/1 ARM loan is perfect because the introductory interest rate lasts for five years before it resets or adjusts.

Since the real estate market crash of 2007, adjustable rate mortgages have bounced back. Statistics show that it represents 14% of the dollar volume on mortgage applications in 2018.

 

How does an adjustable rate mortgage work?

How does an adjustable rate mortgage work?

Normally, the initial interest rate of an ARM is fixed for a period of time. And it is usually lower than that of a fixed rate mortgage.

After that set period of time, the interest rate resets periodically — annually or even monthly.

The interest rates resets based on a benchmark or index, plus an additional spread known as the ARM margin.

The most popular adjustable rate mortgage is the 5/1 ARM. It carries an introductory fixed interest rate for the first five years of its term, along with fixed principal and fixed interest payments. After the initial period of five years of the loan, the interest rate will then adjust depending on different factors. In other words, at year six, the interest rate resets and your monthly payment will surely change.

Adjustable rate mortgages of type 3/1, 7/1, and 10/1 are also available. The first number indicates the number of years that the introductory interest rate remains fixed before it resets.

 

What is better fixed or adjustable rate mortgage?

In order to determine what loan option is better for you, the question to ask is, “How long do you plan on staying in the home?”

“How long do you plan on staying in the home you are buying?”

Depending on your plans for the house you are purchasing, an ARM could be a better option for you.

If you don’t plan on living in one place for very long, you can take advantage of the low introductory rate of an adjustable rate loan.

If, for example, you plan on moving out after seven years, the 7/1 ARM might be a better option. You can sell the house before the interest rate adjusts and you would have had only to pay for a low introductory interest rate.

But if you plan on staying for a long time, or you don’t know when you will be moving out, you run the risk of making higher monthly payments when the rate adjusts after seven years. In this case, a fixed rate loan might be a better choice.

Since statistics show that interest rates have steadily increased since 2016, you can’t bank on the chance that the interest rate will adjust to a lower rate. So if you know you will stay in the house your are buying for a long time, a fixed rate loan offers you a fixed monthly payment.

An ARM can save you a lot of money because of the low introductory interest rate in the short term. But holding one when the interest rate adjusts higher after the introductory period, your monthly payment will increase and might be a problem to your budget.

 

How often does an adjustable rate mortgage adjust?

Lenders base ARM rates on various indexes, benchmarks, and/or a spread. It is a good idea to have the lender explain which index is used as a basis for the rate adjustment and examine how it has fluctuated in the past.

Secure Choice Lending loan experts can explain this to you and examine with you the rate fluctuations in the past.

The period between interest rate changes is called the adjustment period.

An adjustment period of one year means the interest rate would change once every year. This also means your monthly payment will change every year upon adjustment.

An adjustment period of three years means the interest rate, and thus your monthly payment, would change once every three years.

A 5/1 ARM has an introductory fixed rate for five years and an adjustment period of one year after that.

A 7/1 ARM has an introductory fixed rate for seven years and an adjustment period of one year after that.

To avoid hardship due to payment shock, you have to be aware of the interest rates as your adjustment period approaches. But expect to be notified of an adjustment and a new payment well in advance.

Knowing your new payment ahead of time can help avoid problems with payment and give you some time to explore your loan options.

Secure Choice Lending can assist you with an Adjustable Rate Mortgage

Secure Choice Lending can assist you with an Adjustable Rate Mortgage

Taking on an adjustable rate loan doesn’t have to be a risky exercise. You just need to understand what to expect.

If you think an adjustable rate mortgage is right for you, Secure Choice Lending can help.

Just call us at 951-733-8925.

Our Loan Officers will be happy to answer all your questions and discuss your options until everything is clear to you.

Secure Choice Lending is a full service mortgage broker that will secure you a mortgage that doesn’t break the bank.

To streamline the lending experience, our team of financial experts matches consumer needs with the appropriate loan programs and level of risk. With loan officers versed in all mortgage types, solutions to your home-buying questions are a phone call away.

 

Click here to request a quote.

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Click here to call us directly from your mobile.

Conventional Loans

What is a Conventional Loan? (2019 Guide)

What is a Conventional Loan

What does your dream home look like?

How many bedrooms does it have? What kind of flooring are you walking on? How do the windows look? Are those granite countertops or marble? Does the patio have enough space for you to lounge on a lazy Saturday afternoon?

Is that a kids playset in the backyard? Do you have a pool or a treehouse?

Now, take a step back, and what you probably didn’t imagine in that moment of bliss is the homebuying process: the loan application, the various loan types, the requirements and, lastly, how or where to begin.

And that’s OK! You are not alone.

A majority of prospective homeowners have questions about the buying process. What separates them is who they turn to for assistance.

So what do you do? Where do you start?

What you need is clarity.

Support.

Answers.

What you need is Secure Choice Lending.

Call our office at (951) 707-9364 to solve your questions and assuage your concerns.

Still not convinced? This page explains the most popular home loan: conventional.

What is a conventional loan?

conventional loan

A conventional loan is a mortgage that is not guaranteed or insured by the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA) or any other government agency.

These loans are geared toward borrowers with higher credit scores and, at times, larger available funds for a down payment (typically 5-20%).

Conventional loans have products that provide borrowers more flexibility. Additionally, private mortgage insurance, or PMI, is removed at an LTV (loan-to-value) ratio of 80% or less.

It is likely you have heard of conventional loans before, either from your own research or a lender’s recommendation. This is because conventional loans are more commonly used than other government-guaranteed loans, such as FHA loans and VA loans.

In fact, according to the government census, conventional loans were used for 75% of all new home sales in the last quarter of 2018(1).

Simply put. it is the most widely used loan option.

What are the benefits of a Conventional Loan?

If you have a high credit score, and you have saved enough to make a down payment of up to 20%, a conventional loan is likely the right choice for you.

There are many benefits to conventional loans

There are many benefits to conventional loans, for instance:

  • Even if you have less than 20% to put toward a down payment, there is no upfront mortgage insurance fee. Government-backed loans require an upfront funding fee of about 1-3% of the total loan amount.
  • If you can put 20% down, you are not required to get mortgage insurance.
  • Interest rates are low.
  • Fixed-rate mortgage loan options have term lengths ranging from 10 to 30 years.
  • If you are not long for your new home, the adjustable-rate mortgage loan option is available. It has a lower interest rate than the fixed-rate loan option.
  • Because conventional loans are not backed by the government, there are less restrictions than their government-backed peers. For example, conventional loans can be used to purchase a primary residence, a secondary home, a vacation property or a rental property. Government-backed loans can only be used to buy a primary residence.

 

What are the different types of conventional loans?

What are the different types of conventional loans?There are two types of conventional loans.

  1. Conforming Conventional Loan

Conforming conventional loans have terms and conditions that must meet the funding criteria of Fannie Mae and Freddie Mac.

Fannie Mae, or the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corporation, are government-sponsored entities that purchase mortgages from private lenders.

One key condition that Fannie Mae and Freddie Mac imposes is the loan limit. Conforming loans must not exceed the loan limit set every year by the Federal Housing Finance Agency, or FHFA.

fhfa sells the maximum conforming loan limits

According to the FHFA, the maximum conforming loan limit for 2019 for one-unit properties in most of the U.S. is $484,350. You can click here to see a map that shows the 2019 maximum loan limits across the U.S.

Call Secure Choice Lending at (951) 707-9364 to learn what the conforming loan limits are in your area.

  1. Non-conforming Conventional Loan

Conventional loans that exceed the set loan limit are considered non-conforming conventional loans. Also referred to as Jumbo Loans, non-conforming conventional loans are not purchased by Fannie Mae or Freddie Mac because they exceed the loan limit.

Non-conforming loans are funded by private institutions or lenders.

For questions about higher loan limits that exceed the amount set by FHFA, call Secure Choice Lending at (951) 707-9364.

Conventional Loan Rates

Conventional loans make home-buying affordable for many people because of their low interest rates.

Conventional loans make home-buying affordable for many people because of their low interest rates.

Interest rates for these loans change daily, sometimes on an hourly basis, because they are based on mortgage-backed securities (MBS) and are traded just like stocks, which fluctuate throughout the day.

When financial news hits the market, these rates go up or down, depending on the news.

Borrowers who are already approved and already have a property selected can lock in the lowest rates when rates go down.

Your credit score is paramount when applying for a conventional loan.

A high credit scores means a low interest rate.

A low credit score means a high one.

It’s that simple.

Published rates usually are based on the ideal borrower — that is, one with a high credit score and funds available for a 20% down payment. That said, it is best to talk to a loan officer about interest rates.

Call Secure Choice Lending at (951) 707-9364 to get a quote based on your information, not an ideal borrower’s.

How do you qualify for a conventional loan?

How do you qualify for a conventional loan?You could be eligible for a conventional loan if you meet the following requirements:

  • Ideally, you have a credit score of at least 620. Some lenders set a higher minimum credit score requirement. After all, they are taking a greater risk. If you have a lower credit score, you may want to apply for an FHA loan instead.
  • You must be able to provide proof of income, including, but not limited to, recent pay stubs, W2s and tax returns.
  • Your assets must reflect that you have sufficient available funds for the down payment and other closing costs.

Conventional Loan Options and Your Down Payment

While there are no down payment guidelines or standards that lenders must abide by, the size of your down payment will affect the interest rates on your loan, as well as the final loan costs.

Conventional Loan Options and Your Down Payment

Conventional loans typically require a higher down payment when compared to government-backed loans. Most lenders will ask you to put 5% down. However, you can put 10% or 20% down.

For large loan amounts, be prepared to provide an even higher down payment.

For large loan amounts, be prepared to provide an even higher down payment.

A large down payment will result in lower monthly mortgage costs. Moreover, a down payment of at least 20% on a conventional loan eliminates mortgage insurance, a perk that is not available for government-backed loans, which require borrowers pay mortgage insurance regardless of how much they put down.

Secure Choice Lending can Assist you with a Conventional Loan

Secure Choice Lending can Assist you with a Conventional LoanThere’s myriad information on conventional loans, and we know taking it all in at once can be pretty overwhelming.

But don’t panic!

Our loan officers are happy to answer all your questions and discuss your options.

Secure Choice Lending is a full-service mortgage broker that will secure you a mortgage that doesn’t break the bank.

To streamline the lending experience, our team of financial experts matches consumer needs with the appropriate loan programs and level of risk. With loan officers versed in all mortgage types, solutions to your home-buying questions are a phone call away.

 

Click here to request a quote.

Click here to leave us a message.

Click here to call us directly from your mobile.