Fixed Rate Mortgages
The most common type of mortgage program where
your monthly payments for interest and principal never change. Property
taxes and homeowners insurance may increase, but generally your monthly
payments will be very stable.
Fixed-rate mortgages are available for 30 years, 20
years, 15 years and even 10 years. There are also "bi-weekly"
mortgages, which shorten the loan by calling for half the monthly payment
every two weeks. (Since there are 52 weeks in a year, you make 26 payments,
or 13 "months" worth, every year.)
Fixed rate fully amortizing loans have two distinct
features. First, the interest rate remains fixed for the life of the loan.
Secondly, the payments remain level for the life of the loan and are structured
to repay the loan at the end of the loan term. The most common fixed rate
loans are 15 year and 30 year mortgages.
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.
Buydown Options
The most common buydown is the 2-1 buydown. In
the past, for a buyer to secure a 2-1 buydown they would pay 3 points above
current market points in order to pay a below market interest rate during
the first two years of the loan. At the end of the two years they would
then pay the old market rate for the remaining term.
As an example, if the current market rate for a conforming
fixed rate loan is 8.5% at a cost of 1.5 points, the buydown gives the
borrower a first year rate of 6.50%, a second year rate of 7.50% and a
third through 30th year rate of 8.50% and the cost would be 4.5 points.
Buydown were usually paid for by a transferring company because of the
high points associated with them.
In today's market, mortgage companies have designed
variations of the old buydowns rather than charge higher points to the
buyer in the beginning they increase the note rate to cover their yields
in the later years.
As an example, if the current rate for a conforming
fixed rate loan is 8.50% at a cost of 1.5 points, the buydown would give
the buyer a first year rate of 7.25%, a second year rate of 8.25% and a
third through 30th year rate of 9.25% , or a three-quarter point higher
note rate than the current market and the cost would remain at 1.5 points.
Another common buydown is the 3-2-1 buydown which works
much in the same ways as the 2-1 buydown, with the exception of the starting
interest rate being 3% below the note rate. Another variation is the flex-fixed
buydown programs that increase at six month interval rather than annual
intervals.
As an example, for a flex-fixed jumbo buydown
at a cost of 1.5 points, the first six months rate would be 7.50%, the
second six months the rate would be 8.00%, the next six months rate would
be 8.50%, the next six months rate would be 9.00%, the next six months
the rate would be 9.50% and at the 37th month the rate would reach the
note rate of 9.875% and would remain there for the remainder of the term.
A comparable jumbo 30 year fixed at 1.5 points would be 8.875%.
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