Types of Loans

1. FIXED RATE MORTGAGES
   
   
2. ADJUSTABLE RATE LOANS (ARM’s)
   
   
3. CONVERTIBLE LOANS
   
   
4. BALLOON LOANS

Fixed Rate Loans
This is most common type of mortgage program where your monthly payments for the interest and principal (P&I) never change for the life of the loan. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

At Countywide Financial, we offer fixed-rate mortgages for 30 years, 20 years, 15 years and even 10 years, but the most common fixed rate loans are 15 or 30-year loans. A 30-year loan will have the lowest overall monthly payments, but at a slightly higher interest rate. You should consider choosing a fixed rate loan if you plan to keep your property for 7 or more years and want the securing of having fixed monthly payments.

Fixed rate fully amortizing loans have two distinct features:

• The interest rate remains fixed for the life of the loan.
  
• The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30-year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount. To pay off a fixed-rate loan sooner, check with your lender to make sure you can make Prepayments. You should be allowed to make these anytime and for any amount, and at no penalty.

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Adjustable Rate Loans (ARM’s)
Our ARM loans offer you all the features of a fixed rate loan coupled with the value and benefits of an adjustable rate loan. ARM loans generally have an interest rate 2 or more percent below a comparable fixed rate loan, which could allow you to either buy or more expensive home or reduce your monthly payments.

After an initial term, the interest rate on an ARM loan is re-set periodically. This is to keep the rate in line with current market interest rates. For example, a 5/1 ARM loan offers a fixed rate for the first five years, adjusting yearly thereafter. Most ARM loans have a periodic rate cap and lifetime cap to limit the amount the interest rate can increase each adjustment period and over the life of the loan.

You may want to consider an ARM loan if you like the stability of fixed monthly payments for a set period of time and prefer having lower monthly payments. However, the most important factor for considering an ARM loan may be determined by how long you plan to stay in your home.

• If you stay in your home for less than five years, a shorter term ARM may be your best option; this would allow you to have a lower initial monthly payment
  
• if you are planning on staying in your home longer, look to our longer term ARMs that offer you the stability of a fixed rate and payment for a set time, yet at a rate and payment that is lower than the fixed rate mortgage options or increase your monthly payment when you want.
  
• With no prepayment penalties, you can pay an additional amount to your loan and see the effect in the lowering of your monthly payments after the next adjustment period
  

The lender sets the interest rate by adding a margin to an index rate. Common indexes include:

• London Interbank Offered Rate (LIBOR)- The index is quoted for one month, three month, six month and one-year periods; however the six-month quote is most common for mortgages. LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market. A Eurodollar is a dollar deposited in a bank country where the dollar is not the currency.
  
• Cost of Funds Index (COFI)- The Eleventh District of the Federal Home Loan Bank Board, which is comprised of savings institutions in California, Nevada and Arizona, publishes the Cost of Funds Index. This is more common in the West.
  
• Treasury Bill Yields- The yield on the 1-year T-bill, adjusted for a constant-maturity security, is widely used in the East.
  

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Convertible mortgage loans
These are ARM loans that allow you to convert to a fixed-rate loan at or before a specified time. The conversion privilege lets you start off with a low variable rate, then lock in when fixed rates drop low enough.

Balloon mortgage loans
These loans have some of the same features of a fixed rate loan, but as opposed to the 30-year fixed rate loan, balloon loans do not fully amortize over the original term. In other words, the balloon loan is amortized over 30 years, however, at the end of the balloon period (for example - 7 years), but at the end of the loan term, any reminding balance will need to be paid in full (but this balance can be refinanced). Balloon loans have many types of maturities, but most loans terms are 5 to 7 years. A balloon mortgage allows you to minimize your monthly payments until you refinance the loan. Another advantage is that a larger share of your payment may be eligible for the mortgage interest tax deduction.
Countywide Financial offers balloon loan program may be right for you; it allows you a lower rate and payment than our fixed rate mortgages. (you must refinance or pay off the loan). A balloon loan may be a good fit if you know that:

• You want to get a larger home now (with a balloon, rates and payments are often lower than a fixed rate loan)
  
• You income will increase in the future
  
• You may be receiving a lump sum amount of money
  
• You will be moving by the end of the balloon period
  

These situations would allow them to afford a larger home now while possibly paying down or paying off the loan within the balloon period. With no prepayment penalties, you can build the equity in your home and decrease the amount that you owe when the mortgage balloons so that you have a lower amount to refinance or payoff.

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