Texas Mortgage Types

No Point, No Fee | Fixed Rate Loans | Variable-Rate Loans (ARMs)

Fixed-Rate Loans

Plain Vanilla

This is your father's loan. You borrow money, you pay it back, the same payment every month for 30 years (or 15 years, or 40 years) until it's paid off. The rate never changes.

Advantage: You will always know what your payment is.
Disadvantage: This is typically the most expensive loan.

When it is a good idea:

· When you know you will stay in the house for a long time.
· When level payments are important to you for financial planning.
· If you are insecure about your job future.
· If you might want to rent the home in the near future but live in the home now.
· Most Importantly: When interest rates are at a low cycle!

There are two major variations on the fixed-rate loan: Balloon and Buydown.

Balloon

A balloon is a fixed-rate loan amortized typically over 30 years, but it is due and payable in full, typically in five years or seven years. Some have an extension option at the end of the term, where you may have the option to extend it for the remaining 23 or 25 years, but the rate is reset to current market conditions, there is typically a small cost, and you must have a good payment record.

Advantage: Lower cost than a conventional fixed mortgage.
Disadvantage: At the end of the balloon period, you must either sell the home, refinance it, or, if the loan is extendible, accept whatever terms the lender happens to offer at that time.

When it is a good idea:
· If you need a lower rate than a fixed rate will allow in order to qualify.
· If you intend to own the home less than the term of the balloon and will thus sell it anyway.
· When fixed rates are rising, this becomes a very attractive option!

Buydown

A buydown is a fixed-rate loan where you pay extra money up front in points in exchange for a lower rate the first one or two years. Typically the rate is dropped 2% the first year, 1% the second year, and then goes to the full rate. So, if the note rate were 8%, the interest rate the first year would be 6%, the second year 7%, and the third year and every year thereafter, 8%. The up-front points will cost about 2.5% more. Thus, if you would have paid 2 points up front, you would instead pay 4.5.

Advantages: Initial lower rate than a fixed-rate mortgage, and although your payments will increase, they will do so by a given, known amount.

Disadvantage: Very costly up front.

When it is a good idea:
· When fixed rates are at a low cycle, but you can not qualify for the note rate.
· If you are purchasing a home, when the seller is paying for closing costs.
· If you know your income will rise in the next year or two and can cover the increased payments.