Below are some of the many loan options available to refinance your home. Please review this information and give us a call to discuss which option best meets your needs.
Fixed Rate Mortgage
This, the most common type of mortgage program, has two distinct features. First, the interest rate remains fixed for the life of the loan. Second, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15-year and 30-year mortgages, but 20-year and 10-year terms are available.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30-year fixed rate mortgage takes 22.5 years of level payments to pay half of the principal balance.
The main advantage of fixed rates mortgages is the rate is fixed, so you are protected if rates go up. The disadvantages are they typically have a higher interest rate, and the rate does not drop if rates go down.
Adjustable Rate Mortgage (ARM)
An ARM has the characteristic that its interest rate adjusts periodically based on a specified index. The index moves up or down based on the conditions of the financial markets. If the index moves up, your monthly payment will increase. Likewise, if the index drops, your monthly payment will decrease.
ARM's generally begin with an interest rate that is 2 to 3 percent below the comparable fixed rate mortgage. This start rate usually is fixed for a period of time ranging from 1 month to as long as 10 years. As a rule, the lower the start rate the shorter the time before the loan makes its first adjustment.
An advantage of ARM's is that the lower starting interest rate may allow you to buy a more expensive home. An obvious disadvantage is that the interest rate, and thus your mortgage payment, may increase over the life of the loan.
When homeowners outgrow their homes, they often think it's time to sell their homes and move on. For homeowners who want to stay in their homes, a rehab loan is an excellent alternative, allowing the homeowner to finance renovations. Some loan programs allow cash out in addition to the funds for the repairs or renovations.
A rehab loan is a fixed rate, fully-amortizing loan. The program makes no restrictions on the types of repairs, has no required improvements, and has no minimum amount of repairs. Loan amounts are based on the "as completed" value of the property, and the rehabilitation costs can represent up to 50% of the "as completed" value. You also can finance certain construction-related costs, such as inspection, architectural, and engineering fees. The maximum loan amount is based on the lesser of:
- The sum of the purchase price plus the cost of rehabilitation and allowable construction-related costs; and
- The "as completed" value of the property, if the existing mortgage has seasoned for at least one year.
Home Equity Loan
If your home is worth more than your mortgage, then you have equity locked up in your home. Some people in this situation also find themselves saddled with other high interest rate debts. A home equity loan allows you tap that equity to pay off those debts by consolidating them into your mortgage. The desired result is a lower total payment. Mortgage interest rates tend to be lower than interest rates for other debts, and you can spread out the payments over 30 years. As an added benefit, mortgage interest may be deductible on your income tax return while interest on most other debts is not.
Texas law, in most cases, allows you to tap into your home equity only to the extent that your home value exceeds your mortgage balance by at least 25%. This law does not apply to non-owner occupied properties. Also, once you refinance your home using a cash-out home equity loan, state law requires that any subsequent refinance loan also be a home equity loan.
Another way to tap your home equity is using a second mortgage. These loans offer you the ability to get money for home improvement, debt consolidation, or many other reasons without disturbing your first mortgage. A second mortgage can be preferable if you have a low interest first mortgage.
Home Equity Line of Credit
If you want the flexibility to borrow against your home equity whenever you want, a home equity line of credit may be the solution for you. With a line of credit, you borrow only what you need and you pay interest only on what you borrow. Your maximum loan amount is determined by your available equity. As with a standard home equity loan, the total amount borrowed against your home cannot exceed 80% of the value of your home.
A home equity line of credit gives you flexibility, and the interest you pay may be deductible on your income tax return. However, the interest rate is not fixed, so your payment will change as rates change.
The FHA loan program offers loans insured by the Federal Housing Administration and intended to help low- and moderate-income families by lowering some of the barriers to homeownership. Credit guidelines are more lenient than for conventional loans. In fact, even if you have had credit problems, such as a bankruptcy, you may be able to qualify for an FHA loan. FHA loans have competitive interest rates because the federal government insures the loans against default. FHA loans are available as fixed rate and adjustable rate mortgages and may be used to refinance a new or existing one-to-four family home, condominium, or manufactured or mobile home.
In order to cover the risk of default, the FHA requires borrowers pay mortgage insurance. This includes an upfront premium at the time of closing, which may be financed, as well as monthly premiums that are included in the mortgage payment.
To make sure that its programs serve low- and moderate-income people, FHA limits the maximum size of FHA loans. The limits vary by location and may change each year.
A VA loan is a low- or no-down payment loan guaranteed by the Department of Veterans Affairs. It is restricted to individuals qualified by military service or other entitlements. Lenders offer both fixed rate and adjustable rate VA mortgages.
An interest-only mortgage is one that allows you to pay only the interest portion of the loan for a specified period of time. During this period you are not required to make any payments towards the loan principal. Once the period ends, the loan amortizes over the remainder of the term.
Interest-only loans are very attractive when:
- You expect your property to gain value quickly;
- You put a large down payment on the property;
- You intend to keep the property for a short period of time;
- You expect to make significantly more money in the future and want to qualify for more home now.
Despite their attractiveness, interest-only loans have some dangers.
- If you carry the loan past the interest-only period, you may find yourself unable to afford the increased loan payment. We call this payment shock.
- During the interest only period you are not required to make any payments towards the loan principal. You may not be able to afford to sell your property if property values are not increasing because you have limited equity.
Interest Rate Buy-down
An interest rate buy-down is an arrangement that allows the borrower to pay a lower interest rate at the beginning of the loan, typically during the first two or three years, in exchange for points or a higher interest rate for the remainder of the term.
A common buy-down is the a 3-2-1 buy-down, which reduces the interest rate by 3% below the note rate during the first year, 2% in the second year, and 1% in the third year. For this reduced rate, the lender traditionally charges the borrower points at closing.
More recently, lenders have designed variations of the old buy-downs. Rather than charge the borrower higher points, the lender increases the note rate to cover its yield in the later years. For example, if the rate for a conventional 30-year fixed mortgage is 6.0%, the lender might set the note rate to 6.75%. Thus, the buy-down would give the borrower a first year rate of 3.75%, a second rate of 4.75%, a third year rate of 5.75%, and a rate of 6.75% for the remainder of the loan.
An advantage of an interest rate buy-down is it may allow you to qualify for a more expensive home. The disadvantage is the loan is more expensive.
A balloon mortgage is a short term loan that does not fully amortize over the loan's term. While the amortization period may be 30 years, just like a conventional, 30-year mortgage, the loan matures in a shorter period, commonly 5 or 7 years. At the end of this period, the remaining principal on the loan is due, what is called a balloon payment.
You have several options when the loan comes due: you can pay off the loan or you can refinance it. Many lenders offer a conversion feature at the end of the term allowing you to convert the loan to a 30-year, fixed-rate mortgage. The conversion option may depend on certain criteria such as having made your last 24 payments on time. A balloon mortgage with a conversion option often is called a Convertible (e.g., 5/25 or 7/23 Convertible).
You may be offered a lower interest rate on a convertible mortgage, but you risk foreclosure if you cannot exercise the conversion option.