Mortgage Information

Mortgage Options: Features And Benefits

There are many types of mortgage loans available today, and one of them is sure to meet your needs. When you consider which mortgage is best for you, you'll find that a major factor in your decision is the risk of interest rate changes.

If a lender offers an interest rate that will not change over the life of your loan, he or she assumes all the risk associated with the rise and fall of rates over time. When rates rise, the lender could lose money. When they fall, the lender could make money. Either way, the risk belongs to the lender. Long-term fixed rate loans, where the lender takes all the risk and the buyer none, are very popular. They are also the most expensive, since the lender must set a price that reflects the higher risk.

On the other hand, if the lender can periodically adjust the rate to mirror changes in the financial markets, the risk associated with rate changes is shared, and the lender can charge less interest. The shorter the time between adjustments, the more risk is shifted to the borrower. Borrowers who assume more risk get a lower rate in return, but along with this comes the possibility of changes in the monthly payment.

So why apply for an adjustable rate mortgage (ARM) when it means that you assume some of the risk?

  • Because of the lower initial interest rate, an ARM can mean smaller initial monthly payments than a fixed rate loan. This lets you stretch your income.
  • You may qualify for more house when applying for an ARM. This can make the difference between settling for the house that is "just okay" or getting the one you really want.

30 Year Fixed Rate Loan

Features:
  • Interest rate is fixed for 30 years
  • Principal and interest portion of monthly payment will not change
  • Monthly payment amount is sufficient to pay back principal and interest in 30 years
Benefit:
  • Security of no changes in principal and interest portion of monthly payment
Disadvantage
  • Typically, the highest interest rate of the common loan types. (It may not be wise to pay the higherrate if you plan to own the house for only a few years.)

15 Year Fixed Rate Loan

Features:
  • Interest rate is fixed for 15 years
  • Monthly payment is sufficient to pay back the entire loan in 15 years
  • Interest savings result from quicker payoff and may be even greater if the 15-year rate is lower than the 30 year
Benefit:
  • Fixed rate security
  • Earn equity faster
  • Significant interest savings
  • Helpful if you plan to stay in the house a long time
Disadvantage
  • Higher monthly payment than 30 year loan because of shorter term
  • Rate may still be higher than the initial ARM rate
Tip:You can take out a 30 year loan and make additional principal payments at your convenience to get the advantages of a shorter term without locking yourself into the higher payments. The key is that you are free to make extra payments when you want to, rather than being locked in to higher monthly payments with a 15 year loan.

1 Year Adjustable Rate Mortgage (ARM)

Features:
  • 30 year loan during which the lender can change the interest rate every year
  • Initial rate is lower to reflect the risk that the borrower assumes by agreeing to annual rate adjustments
  • Most caps limit the adjustments to 2% annually (Over the life of the loan, the rate usually may not increase more than 6%)
  • Rate is based on an index outside the lender's control. The lender charges a set margin above the index
Benefit:
  • Initial rate is lower, so you may qualify for more house
  • You won't have to refinance when rates drop
  • Despite the risk of rate changes each year, you could benefit from continued lower payments if rates don't rise
  • Helpful if you plan to stay in the house a long time
Example: You have to choose between a one year adjustable rate at 4% or a fixed rate at 7%. Assuming the worst case scenario, your adjustable rate in year two would be 6% and year three 8%. Averaged over the three years, your rate would be 6%, or 1% less than the fixed rate. If the worst case did not occur, your three-year average would be less than 6%.

Disadvantage
  • Rate changes every year can make budgeting difficult. (The first increase can be the largest, at a time which is most difficult for many people.)
Tip: When considering any adjustable rate mortgage, calculate your monthly payment in the worst case scenario. If this fits your budget and is an acceptable risk level, the ARM may save you money in the long run.

5-1 Fixed Rate ARM

Features:
  • Rate is fixed for five years, switches to one year adjustable in sixth year
  • Initial rate is normally higher than one year ARM but lower than fixed
  • Annual rate increases generally limited to 2%. (Lifetime increase generally limited to 5%)
Benefit:
  • Lower initial rate than most 30 or 15 year fixed rate loans, while maintaining security of a fixed rate for 5 years
  • Monthly principal and interest payments remain the same in the loan's early years, at a time when most people can least afford an increase
  • This loan may be right for you if you have expectations of increased income in the future, or if you do not expect to stay in the home more than a few years
Disadvantage
  • Worst case rate increases could mean significant changes to your monthly payment

Special Mortgage Programs

Many lenders offer special mortgages designed to give first-time homebuyers the help they need. These special programs vary by lender.

Features to look for:
  • Discounted interest rates
  • Lower downpayment requirements
  • More lenient qualifying ratios
  • Closing costs that may be financed with the mortgage loan
  • Mortgage loans up to 100% of the home's value
  • Credit counseling option to help you prepare for a mortgage
Benefit:
  • Helps those with limited savings to become homeowners
  • Lower interest rate makes qualification easier and saves money over the life of the loan
Disadvantage
  • May not be available in all neighborhoods
  • Income limits may exclude some buyers
  • May only be available to first-time homebuyers

Our goal is to provide helpful mortgage information to assist you in becoming a better informed consumer. Federal regulations require that we provide the following payment examples. A Dollar Bank Representative will gladly answer any questions you have.

30 Year Fixed Rate 15 Year Fixed Rate 1 Year Adjustable 5-1 Fixed Rate ARM
Mortgage Amount$100,000$100,000$100,000$100,000
Annual Percentage Rate8.00%7.50%6.125%7.375%
Points0000
Monthly Payment$733.76$927.01$607.61$690.67
Years to Payment30153030
Number of Payments360180360360
Sum of Payments$264,153.60$166,861.80$218,739.60$248,641.20

To try our mortgage calculator, click here.

The information presented in this publication is general in nature; it is not our intention to provide specific advice to individuals or a comprehensive discussion of the subject matter. We suggest that you consult with your financial or tax advisor, accountant or attorney to obtain specific advice or comprehensive information.
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