loanproducts

In today's ever changing mortgage environment we find ourselves having to deal with new loan products on a continual basis. The purpose of this page is to focus on some of the more mainstream products and the kinds of situations they are suitable for. Should you have an interest in a product you have read or heard about but which we have not covered, please call your Brentwood Lending Group loan consultant for more information.

Fixed rate loans (Typically with a 30 or 15 year term)

A loan with an interest rate and a monthly payment that remains the same for the life of the loan. The monthly payment includes both principal and interest. The principal portion of each payment increases over time so that at the end of the term the entire loan will be paid off.

Benefits

If interest rates increase over time your rate and payments will remain the same.
Because you know what your housing expense will be over time it will be easier to plan for other expenses and set long term financial goals for you and your family.

Risks

If rates go down over time you will be locked into a higher interest rate. The only way to enjoy the benefits of the lower rates will be to refinance.

As the interest rate on these loans is typically higher than shorter term mortgages, the loan you will qualify for will be less than if you choose a shorter term loan.

As your housing payment will be higher than with other types of loans you will have less money left over to use for other investments.

The average length of time Californian's live in a home is 5 to 7 years. The security of these types of loans usually ends up in homeowners spending a lot more on their house payments than they ultimately need to.

Who are these loans suitable for?

Homeowners with steady incomes who do not expect significant increases in income over time.

Homeowners who are totally averse to risk.

Some fixed rate loans are also available with an interest only option for a set period of time, usually ten years. The benefit of these loans compared to the regular fixed rate loans is that they will allow you to qualify for a higher loan amount.

Adjustable Rate Mortgages (ARM)
(Typically 3, 5, 7 or 10 years)

These loans have a fixed interest rate and payment for a selected period of time after which both the interest rate and the payment will change. The selected period of time is usually 3, 5, 7 or 10 years, and the interest rate is usually (but not always) lower the shorter the period you lock it in for. These loans typically have lower interest rates and payments than fixed rate mortgages, at least for the initial period.

Benefits

Because monthly payments are usually lower than fixed rate mortgages, ARM's will enable you to qualify for a higher mortgage and therefore a larger home.

During periods of declining interest rates your rate and payments could go down.

ARM's will improve your monthly cash flow and free up cash for other needs.

Risks

At the end of the initial period your interest rate and payment will adjust based on the index at the time plus the margin. If the index has increased since you obtained your loan, your payments could increase, in some cases substantially.

Who are these loans suitable for?

Homeowners who expect large salary increases in the future.

Couples where only one spouse is working and the other spouse is getting ready to go back to work.

Homeowners who do not expect to remain in their homes for longer than the initial period.

Some adjustable rate loans are also available with an interest only option for a set period of time, usually ten years. The benefit of these loans compared to the regular adjustable rate loans is that they will allow you to qualify for a higher loan amount.

Negative amortization loans
(Also known as option ARM's)

These loans are similar to adjustable rate loans in that the interest rates can adjust at various times based on the index and margin set at the time you obtained your loan. These loans usually come with four different payment options.

A minimum payment - This payment is calculated using a teaser rate and is usually less than the interest only payment. Making this payment will result in your mortgage balance increasing on a monthly basis.

An interest only payment - This payment will cover your monthly interest and your mortgage balance owing will remain the same.

A payment amortized over 30 years - This payment would include principal and interest and would result in your mortgage being paid off over 30 years.

A payment amortized over 15 years - This payment would include principal and interest and would result in your mortgage being paid off over 15 years.

Benefits

Because monthly payments are significantly lower than other types of mortgages you can qualify for substantially more house than with other loans.

The cash you save on a monthly basis can potentially be invested in products that will yield a higher return than the interest rate on your loan.

In some situations these types of loans can help you manage your cash flows.

Risks

By making the minimum payment your loan balance will increase each month. In extreme situations your loan balance owing could be higher than the value of your home

Who are these loans suitable for?

Self employed homeowners who experience large fluctuations in monthly income.

Financially savvy investors who can use the extra monthly cash for investments returning a higher yield.

Speculators during periods of fast appreciation

Lines of Credit

Are typically used as a second mortgage on your property. The interest rate is adjustable and is usually set at prime plus or minus a margin. In general the higher your credit score and the more equity you have in your property the lower your margin and therefore your interest rate will be. During the initial period, usually ten to fifteen years you can pay your balance down and re-use the funds available to you as many times as you like. Your monthly payment will be an interest only payment and will be calculated on the amount of funds you have used.

Benefits

You will have a lot of flexibility as you can use and pay down your balance as many times as you wish.

It is advisable to set up a line of credit on your property even if you do not have a need for the cash. You will be able to draw all or a part of the funds in the future in cases of emergencies or for other investment opportunities.

Payments are interest only for a set period of time and will result in lower monthly payments than an amortizing loan.

Risks

Using the funds for frivolous purchases.

In periods of increasing interest rates you could see your monthly payment increase substantially.

Some of the uses of lines of credit include...

Improvements to your home that will increase its value.

Paying for college educations.

Paying off high interest rate debt.

Making investments that you expect to yield a higher return than your interest rate on the line of credit.

If you would like to discuss any of these loans in more detail, or any loans we have not covered, please feel free to call a BLG loan consultant or send us an email.