Loan Programs

The first step to realizing your dream is building a strong foundation.

Types of Loans	Advantages	Disadvantages
Fixed Rate
30-year fixed 15-year fixed	• Fixed monthly payments (over life of loan) • Fixed interest rate • If rates go up, you're protected • If rates go down, you can refinance	• Higher monthly payment • Higher interest rate • Rate does not go down
Adjustable Rate
10/1 ARM 7/1 ARM 3/1 ARM	• Lower initial monthly payments • Monthly payment may go down • May get approved for higher loan amount	• More risk • Monthly payment may increase
Interest Only
30-Year Fixed Interest Only 3/1 Fixed ARM period Interest Only 5/1 Fixed ARM period Interest Only 6 Month Adjustable Interest Only 1 Month Adjustable Interest Only	• Lowest monthly payments • May get approved for higher loan amount • Won't pay out cash to build equity • Leverage savings into other investments • Entire payment is tax-deductible	• Interest rate will most likely increase • Possbility of overextending yourself • Home could lose value • You're not expecting increased future earnings • Temptation to use money savings on pampering lifestyle • Equity does not build as fast without paying toward principal
Balloon
7 Year 5 Year	• Lower initial monthly payments • Lower payment over shorter period of time • May offer option to refinance after initial term	• Risk of higher rates at end of initial fixed period • Risk of foreclosure if balloon payment not met or if you cannot refinance or exercise conversion option

Choosing a Loan Program

Unfortunately, there isn't a single or simple answer to this question. The right type of mortgage for you depends on several different factors:

Your current financial picture
How you expect your finances to change
How long you intend to keep your house
How comfortable you are with your mortgage payment changing

For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences with a Back Bay mortgage professional.

Fixed Rate Mortgages

The traditional fixed rate mortgage is the most common type of loan program where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This type of mortgage is structured, or "amortized" so that it will be completely paid off by the end of the loan term. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks.

Even though you have a fixed rate mortgage, your monthly payment may vary if you have an "impound account". In addition to the monthly loan payment, some lenders collect additional money each month (from folks who put less than 20% cash down when purchasing their home) for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound account by the lender who uses it to pay the borrowers' property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.

To find out if a fixed rate mortgage is right for you, contact one of our seasoned mortgage professionals today.

Adjustable Rate Mortgages

The mortgage interest rate will be fixed for a stated period of time and will then become adjustable for the remainder of the loan. For example, a 5-year fixed (30-year) loan would have a fixed interest rate for the first five years and then convert to an adjustable rate for the remaining 25 years. This adjustment is based on changes in a pre-selected index, and will take place according to a pre-defined schedule (generally once a year). Your interest rate and monthly payment will fluctuate based on changes in your index. The most common indices are the Treasury Bill, Certificate of Deposit (CD), LIBOR and COFI.

Adjustable rate loans have more risk due to the possibility that the interest rate could increase. However, because you are assuming additional risk the lender will generally reward you with a lower interest rate and monthly payment during the initial fixed interest period. These loans are of particular benefit to borrowers that plan to either sell the property or refinance before reaching the adjustable period.

To find out if an ARM is right for you, contact one of our seasoned mortgage professionals today.

Hybrid ARMs

Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.

The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that's fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while have some period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes.

Homeowners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to live long in their homes. By getting a lower rate and lower monthly payments than with a 30- or 15-year loan, they can break even more quickly on refinancing costs such as title insurance and the appraisal fee. Since the monthly payment will be lower, borrowers can make extra payments and pay off the loan early; saving thousands of dollars during the years they have the loan.

To find out if a hybrid ARM is right for you, contact one of our seasoned mortgage professionals today.

Interest Only Mortgages

A mortgage is called "Interest Only" when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only loans are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.

You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.

Since you'll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.

As an example, if borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time.

Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.

To find out if a hybrid ARM is right for you, contact one of our seasoned mortgage professionals today.

Balloon Mortgages

Balloon mortgages have a note rate that is fixed for an initial period of time, and then the remaining principal balance is due at the end of the term. When the final balloon payment is due at the end of the term, the borrower can either refinance into another mortgage or pay off the balance. The balloon loans do not have any penalties for paying off the loan earlier than it is due. You would be able to refinance the loan at any time during the term. The two different terms a balloon loan can have are typically 5 or 7 years. For example if you had a 7 year balloon mortgage with an interest rate of 7.5%, your rate would remain constant for the full term and at the end of 7 years, the remaining principal balance would become due.

To find out if a balloon mortgage is right for you, contact one of our seasoned mortgage professionals today.

At Back Bay, we believe there's a home loan for every borrower. Our mortgage professionals will help you discover the home loan that is just right for you. Let us show you how your home mortgage can work harder for you.

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