Guidelines for self-employed home buyers and refinancings which includes lowering your existing interest rate, lowering your monthly payment, shortening your loan term, and even taking cash out to do home improvements, consolidating debt, etc. have loosened up over the years. We at Centric Mortgage pride ourselves on our expertise and ability to properly assess a Self Employed person's opportunities and our ability to help them capitalize on them.
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Buying a home can be fun and exciting. Figuring out the financing details, not so much. Even though housing prices and mortgage rates gyrate over time, one constant buyers can rely on to stay the same is a fixed-rate mortgage.
What is a fixed-rate mortgage?
A fixed-rate mortgage has an interest rate that remains the same for the life of the loan. In other words, your total monthly payment of principal and interest will remain the same over time. (Note: Your mortgage payments can fluctuate, though, if your property taxes or homeowners insurance rates fluctuate.) A fixed-rate mortgage is the most popular type of financing because it offers predictability and stability for your budget.
Fixed-rate mortgages tend to have a higher interest rate than an adjustable-rate mortgage, or ARM. But ARMs have low, fixed rates for a brief period, typically three, five or seven years, before the interest rate resets. After that time, rates can go up or down (as can your monthly payments) for the remainder of the loan term, though most ARMs have a cap.
RATES: Search for today’s lowest mortgage rates
How long do I repay a fixed-rate mortgage?
The mortgage term is the number of years you repay the loan. Fixed-rate mortgages usually come in terms of 15 or 30 years. Here are some pros and cons of each term:
30-year
Pro:
For any given loan amount, the monthly payments are lower than a shorter-term mortgage.
Cons:
You pay more total interest over the life of the loan compared with a shorter term.
The interest rate is higher.
15-year
Pros:
You pay less total interest over the life of the loan.
The interest rate is lower.
Con:
For a given loan amount, the monthly payments are higher.
Many borrowers prefer a 30-year, fixed-rate mortgage over a 15-year loan because the monthly payment is lower for the same loan amount. Choosing a longer fixed term means you can borrow more money, too. It can also free up your monthly cash flow for other financial goals, such as saving for emergencies, retirement or your child’s college tuition.
A 15-year fixed mortgage is ideal for people who have the cash flow and want to pay off their home faster at less interest. Your monthly payments will be higher, though, because you’re repaying more principal so run the numbers with your lender to ensure you can afford it without skimping on other financial goals.
Similar payments, different amounts
Meet Jill, a first-time buyer with a tight budget. Jill knows she can afford about $1,000 a month in principal and interest. Jill’s lender offers a 30-year fixed with an interest rate of 4.5 percent or a 15-year fixed at 4 percent.
30-year fixed at 4.5 percent: $1,013 monthly principal and interest for a $200,000 loan
15-year fixed at 4 percent: $1,013 monthly principal and interest for a $137,000 loan
For the same monthly payment, Jill can borrow $63,000 more with a 30-year fixed. However, Jill will pay a lot more in interest (keep reading).
Same amounts, different interest
For a $200,000 mortgage:
30-year fixed at 4.5 percent: $164,813 total interest for the life of the loan
15-year fixed at 4 percent: $66,288 total interest for the life of the loan, or $98,525 less
When you get a mortgage, you can choose a fixed-rate or adjustable-rate mortgage, known as an ARM. While fixed-rate mortgages keep the same interest rate for the life of the loan, adjustable-rate mortgages have fluctuating rates.
What is an adjustable-rate mortgage?
An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down. Generally, the initial interest rate is lower than that of a comparable fixed-rate mortgage. After that period ends, interest rates — and your monthly payments — can go lower or higher.
Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles. The U.S. has been in an upward interest rate trend since about 2016, but the five years before that rates were low and flat.
See how mortgage rates compare between different loan types.
Fixed-rate periods
The most popular adjustable-rate mortgage is the 5/1 ARM:
The 5/1 ARM’s introductory rate lasts for five years. (That’s the “5” in 5/1.)
The 5/1 ARM’s introductory rate lasts for five years. (That’s the “5” in 5/1.)
After that, the interest rate can change every year. (That’s the “1” in 5/1.)
Some lenders offer 3/1 ARMs, 7/1 ARMs and 10/1 ARMs.
Adjustable rate mortgages follow rate indexes and margins
After the fixed-rate period ends, the interest rate on an adjustable-rate mortgage moves up and down based on the index it is tied to. The index is an interest rate set by market forces and published by a neutral party. There are many indexes, and the loan paperwork identifies which index a particular adjustable-rate mortgage follows.
To set the ARM rate, the lender takes the index rate and adds an agreed-upon number of percentage points, called the margin. The index rate can change, but the margin does not.
For example, if the index is 1.25 percent and the margin is 3 percentage points, they are added together for an interest rate of 4.25 percent. If, a year later, the index is 1.5 percent, then the interest rate on your loan will rise to 4.5 percent.
Major indexes for adjustable-rate mortgages
Most adjustable-rate mortgage rates are tied to the performance of one of three major indexes.
Weekly constant maturity yield on one-year Treasury bill. The yield debt securities issued by the U.S. Treasury are paying, as tracked by the Federal Reserve Board.
11th District cost of funds index (COFI). The interest financial institutions in the western U.S. are paying on deposits they hold.
London Interbank Offered Rate (Libor). The rate most international banks are charging each other on large loans. Libor will be phased out by the end of 2021.
Sky’s not the limit on rates
You’re insulated from possible steep year-to-year increases in monthly payments because ARMs come with caps limiting the amount by which rates and payments can change.
Caps come in several forms:
A periodic rate cap limits how much the interest rate can change from one year to the next.
A lifetime rate cap limits how much the interest rate can rise over the life of the loan.
A payment cap limits the amount the monthly payment can rise over the life of the loan in dollars, rather than how much the rate can change in percentage points.
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