Residential Loans
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We offer many different types of home loans. Generally speaking there are two broad
classes of home loans:
- Conventional loans - these loans are non-government backed loans and are offered with fixed or adjustable terms.
- Government loans - These loans are insured or guaranteed by the U.S. government (FHA and VA loans) or the State of California (CALHFA loans).
Also see First-Time Home Buyer Loans.
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Fixed-Rate Loans - These loans provide for the regular payment of principal and
interest for loans terms up to 40 years. The most common fixed rate loans are fixed for
15, 20 or 30 years. Your principal and interest payment doesn't change providing for
easier budgeting and financial planning.
Adjustable-Rate Loans (ARM'S) - The interest rate for an adjustable-rate loan is the
sum of an "index" that can and will move plus a "margin" that stays the same for the life
of the loan. The index is a rate set by market forces. ARM'S usually offer lower initial
interest rates and hence lower principal and interest payments than most fixed rate
mortgages. However payments will adjust up or down at times specified in your loan
documents and can result in significant payment increases. The most common adjustablerate
loans provide for interest rates fixed for the initial 1, 3, 5, 7 or 10 years. (These loans
are sometimes referred to as "Hybrid Adjustable-Rate Loans.")
A "Hybrid Adjustable-Rate loan" usually carries a lower initial principal and interest
payment than a fixed-rate loan for the initial fixed period of 3, 5,7 or 10 years. After the
initial fixed period these loans operate like an adjustable-rate loan, with principal and
interest payments adjusting up and down based on a specific interest rate index that can
move plus a margin that stays the same for the life of the loan. People who choose this
type of loan plan to move or refinance before the fixed period ends.
Interest-Only Loans - There are a variety of interest-only loans. Oftentimes interestonly
loans are "Hybrid Loans" (see above) because there is an introductory period of up
to 10 years where you can elect to make an interest-only payment and afterwards the
interest-only loan (in most cases) can adjust at least once. An interest-only loan, properly
utilized, can be a very good financing alternative. For a fixed period of time you are only
required to make the "interest only" mortgage payment. The problem with this scenario is
that you are not reducing the principal. Interest only loans allow for principal reduction.
You can pay as much as you want over and above the interest-only payment amount and
the following month your mortgage payment will be reduced because your payment is
calculated on a reduced principal balance.
There are several popular indexes. The Libor rate is based on rates that contributor
banks in London offer each other for interbank deposits. There are several Libor rates
used for mortgage loans; the one-month Libor, the six-month Libor and the one-year
Libor.
The prime rate is the interest rate charged by banks to their most creditworthy
customers. The prime rate does not change on a regular basis but almost always changes
after the Federal Reserve Board changes short-term interest rates.
The 12 Month Treasury Average index (MTA) - This index is the 12 month average of
the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of
one year. This index is calculated by averaging the previous 12 rates of the 1 Year CMT
(The One Year Treasury index - another popular index). Because the index is an
averaging index the rates moves up and down more slowly than the Prime or Libor
indexes. |
