One of the great benefits of owning your home is the large income tax deduction you're allowed for mortgage interest. However, when you refinance your mortgage loan into a lower interest rate, you'll pay less interest. Lowering interest payments also means shrinking that juicy tax deduction.
What happens to your taxes if you do a cash-out refinancing? It depends on what you use the extra funds for. First or second mortgages that are used to buy, build, or improve your home are termed "Home Acquisition Debt" (HAD) by the IRS. If you refinance to get either better rates or more favorable terms, you're accumulating HAD. If you do a cash-out refinance, the money that is not used for home improvements is considered Home Equity Debt (HED).
Acquisition Debt is fully deductible, up to $500,000 for individuals, and $1,000,000 for married couples who file joint returns. The deduction limit for Equity Debt is $100,000 more than the existing debt at the time of your refinancing. If you have a mortgage with a balance of $200,000, you can refinance into a $300,000 loan (assuming your home appraises for at least that much now), and still deduct the full interest payments from your taxes. The interest paid on any balance higher than $300,000 is not deductible at all.
Getting the Point
You can take out points on your mortgage in order to push down the interest rate even further. Points are generally tax-deductible, like interest payments-except when you're refinancing.
Some points are charged for lender services (not tax deductible), and others for prepaid interest (deductible). In general, the points are prorated throughout the life of the loan; so if you paid $4,000 in points for your 30-year loan, but $1,000 of that was for services, you can deduct 1/30th of $3,000, which is $100 a year.
But if part of the refinancing funds were used for home improvements, a portion of the points can be deducted immediately. For example, if you took a $100,000 mortgage loan, you could pay off an existing $80,000 mortgage and use the rest for home improvements. In this case, you can deduct 20 percent of the points the first year, and spread the remainder throughout the next 29 years.
One more twist: If you refinance again, all points that have not yet been deducted are applied in that one year, regardless of whether the new loan carries any points.
As you can see, refinancing your mortgage can make tax time a lot more interesting. It pays to do a tax code cram session before deciding how to refinance, so you won't get caught unprepared when you file your next tax return.
Start here to compare refinance rates from top lenders in our network.
http://www.mortgageloan.com/mortgage-refinance-and-taxes-514
Saturday, May 19, 2007
The Hidden Costs of Mortgage Refinancing
There can be hefty costs involved in a mortgage refinance. On the flip side, there can be ample savings. Before resolving to take the plunge, you should do the math, take everything into account, and see how much you'd really save. The answer may surprise - and even delight - you.
Just like your original loan, refinancing a mortgage loan involves closing costs. They'll generally be lower, as some fees don't apply to refinancing; but they can still be substantial. Confirm the fees that your lender will charge this time around.
Some mortgage lenders offer an option to roll the refinancing closing costs into the loan itself, known as 'roll-in' refinancing. This will result in somewhat higher monthly payments, because your loan balance is higher; but there would be no up-front costs.
Savings versus Costs
A very popular reason why people refinance is to lower their interest rates. To see how much you can save through better rates alone, use our amortization calculator. Simply enter the loan amount, interest rate, and the length of the loan to see how much interest and principal you'll be paying each month.
A couple of percentage points can make a big difference. For example, you can save $300 a month by switching your $180,000, 30-year loan from a rate of 9 percent to 7 percent. That's quite a bit of pocket change, even for those with big pockets.
However, if you do a home loan mortgage refinancing for a lower rate, it may lead to a smaller tax deduction, and, in effect, higher income taxes. It's an overlooked cost of refinancing. Look at your tax bracket to figure out the impact it will have on on your tax return. For instance, if you're in the 25 percent tax bracket, and a mortgage refinance will lower your monthly interest payment by $200, taxes will claim $50 of that savings. As a result, your true savings will be $150 a month.
Refinancing can also help you lose those pesky PMI payments, especially if your home has increased in value since you bought it. (Check your current mortgage statement to see how much PMI is costing you now). As long as the new loan amount is lower than 80 percent of the property value, you can end your PMI payments.
The Bottom Line
If you're stuck in a high-interest loan, refinancing today may save you a lot of money. Lowering your rate just a couple of percentage points may let you recoup the closing costs in a matter of months. However, before you leap, look at the numbers. Preparation makes for great savings and no unanticipated surprises.
Start here to compare refinance rates from top lenders in our network.
http://www.mortgageloan.com/the-hidden-costs-of-mortgage-refinancing-513
Just like your original loan, refinancing a mortgage loan involves closing costs. They'll generally be lower, as some fees don't apply to refinancing; but they can still be substantial. Confirm the fees that your lender will charge this time around.
Some mortgage lenders offer an option to roll the refinancing closing costs into the loan itself, known as 'roll-in' refinancing. This will result in somewhat higher monthly payments, because your loan balance is higher; but there would be no up-front costs.
Savings versus Costs
A very popular reason why people refinance is to lower their interest rates. To see how much you can save through better rates alone, use our amortization calculator. Simply enter the loan amount, interest rate, and the length of the loan to see how much interest and principal you'll be paying each month.
A couple of percentage points can make a big difference. For example, you can save $300 a month by switching your $180,000, 30-year loan from a rate of 9 percent to 7 percent. That's quite a bit of pocket change, even for those with big pockets.
However, if you do a home loan mortgage refinancing for a lower rate, it may lead to a smaller tax deduction, and, in effect, higher income taxes. It's an overlooked cost of refinancing. Look at your tax bracket to figure out the impact it will have on on your tax return. For instance, if you're in the 25 percent tax bracket, and a mortgage refinance will lower your monthly interest payment by $200, taxes will claim $50 of that savings. As a result, your true savings will be $150 a month.
Refinancing can also help you lose those pesky PMI payments, especially if your home has increased in value since you bought it. (Check your current mortgage statement to see how much PMI is costing you now). As long as the new loan amount is lower than 80 percent of the property value, you can end your PMI payments.
The Bottom Line
If you're stuck in a high-interest loan, refinancing today may save you a lot of money. Lowering your rate just a couple of percentage points may let you recoup the closing costs in a matter of months. However, before you leap, look at the numbers. Preparation makes for great savings and no unanticipated surprises.
Start here to compare refinance rates from top lenders in our network.
http://www.mortgageloan.com/the-hidden-costs-of-mortgage-refinancing-513
Refinancing Tips - Five Steps to a Speedy Loan
Many homeowners complain that, in these days of refinancing fever, customer service is sluggish, at best. Lenders don't return phone calls or reply to emails, leaving consumers in limbo. Here are five things you can do to help grease the wheels before interest rates have another chance to rise.
Compare Refinance Rates
1. Have your ducks in a row: Documents are the name of the game when it's time to processing a mortgage loan. Call ahead and find out what you need to bring before you sign the application on the dotted line. These may include tax returns, legal papers, or your spouse (to sign paperwork). If you have everything ready when you show up at the bank, things move quickly.
2. Be ready for the race: It's great if you're "on the mark" and "set;" but if you're not ready to "go," you may be eliminated from the race. If fees are due for credit checks, appraisals, etc. before the closing can take place, make sure that you have the money in hand, and pay them promptly. If you aren't ready to lock in a rate, your home mortgage application process may not go forward. By the time you finally decide, more decisive customers may reach the finish line first.
3. Treat it like a doctor's appointment: When you go to the doctor with a specific complaint, the most important thing is to communicate your symptoms. This way, the doctor can prescribe the ideal remedy. Before you make an appointment with a mortgage loan officer, write down your top five reasons for refinancing. This way, you can get the exact mortgage package that's appropriate for you.
4. Narrow the field: Use the Internet to research various mortgage options, and narrow the field before you talk to your lender. Do you want an adjustable or fixed rate? Do you want to pay the same amount each month, but shorten the life of the loan? Are you trying to free up some needed cash, or just hoping to lock in a lower rate? Do you want to pay down principal, or just pay interest? Ask yourself these questions ahead of time. By knowing your priorities, it will be easier for your lender to suggest the home loan mortgage refinancing that best fits your specific needs.
5. Don't babysit the mortgage refinancing loan process: Once the loan is in progress, keep in touch with your lender, but don't become a backseat driver who looks over the loan officer's shoulder every mile of the way.
By following these five simple protocols, you'll greatly assist your loan officer. And that translates into helping yourself to a smoother and faster mortgage loan refinance.
Start here to compare refinance rates from top lenders in our network.
http://www.mortgageloan.com/refinancing-tips-five-steps
Compare Refinance Rates
1. Have your ducks in a row: Documents are the name of the game when it's time to processing a mortgage loan. Call ahead and find out what you need to bring before you sign the application on the dotted line. These may include tax returns, legal papers, or your spouse (to sign paperwork). If you have everything ready when you show up at the bank, things move quickly.
2. Be ready for the race: It's great if you're "on the mark" and "set;" but if you're not ready to "go," you may be eliminated from the race. If fees are due for credit checks, appraisals, etc. before the closing can take place, make sure that you have the money in hand, and pay them promptly. If you aren't ready to lock in a rate, your home mortgage application process may not go forward. By the time you finally decide, more decisive customers may reach the finish line first.
3. Treat it like a doctor's appointment: When you go to the doctor with a specific complaint, the most important thing is to communicate your symptoms. This way, the doctor can prescribe the ideal remedy. Before you make an appointment with a mortgage loan officer, write down your top five reasons for refinancing. This way, you can get the exact mortgage package that's appropriate for you.
4. Narrow the field: Use the Internet to research various mortgage options, and narrow the field before you talk to your lender. Do you want an adjustable or fixed rate? Do you want to pay the same amount each month, but shorten the life of the loan? Are you trying to free up some needed cash, or just hoping to lock in a lower rate? Do you want to pay down principal, or just pay interest? Ask yourself these questions ahead of time. By knowing your priorities, it will be easier for your lender to suggest the home loan mortgage refinancing that best fits your specific needs.
5. Don't babysit the mortgage refinancing loan process: Once the loan is in progress, keep in touch with your lender, but don't become a backseat driver who looks over the loan officer's shoulder every mile of the way.
By following these five simple protocols, you'll greatly assist your loan officer. And that translates into helping yourself to a smoother and faster mortgage loan refinance.
Start here to compare refinance rates from top lenders in our network.
http://www.mortgageloan.com/refinancing-tips-five-steps
Friday, May 18, 2007
Disadvantages of Second Mortgages
Optimists love to look on the bright side of things. But when it comes to financial products like second mortgages, they also need to look at the not-so-bright side. Second mortgages have many advantages, but they have weighty disadvantages, too. In any financial transaction, it's important to be aware of all your potential risks.
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Compare rates from up to 4 lenders for mortgage
Second mortgage defined
In many ways, a second mortgage is a duplicate of your first. It's a loan secured against your house, and the interest you pay is tax deductible. The difference occurs in the event that you default on your loan. The lender who holds the primary mortgage is the first to receive any funds recovered from the defaulted loan. The second mortgage lender is next in line. Because second mortgages are a slightly riskier proposition for lenders, they're generally tagged with higher interest rates.
Versatility galore
If you've built up quite a bit of equity in your home, a second mortgage allows you to tap large sums of money at one time. How you use the funds is entirely your decision. Typical uses include home improvements, paying for college, debt consolidation, and even paying for private mortgage insurance.
A walk on the dark side
All the plusses of having a loan secured against your house can turn into a huge minus if you fail to make your mortgage payment. A bank could foreclose on your home if you default on this loan and your primary mortgage.
That's the worst-case scenario, but there are even more potential disadvantages. Late payments can include hefty fees and serious blights to your credit report. And while second mortgage interest rates generally beat the rates of credit cards, they're generally higher than first mortgage rates.
There's plenty to celebrate about second mortgages but, like seconds at the dinner table, they can also get you sick to your stomach if you can't handle the extra load. Whether it's digesting a meal or digesting a mortgage loan, make sure that you have the stomach for it.
Start here to compare mortgage rates from top lenders in our network.
http://www.mortgageloan.com/disadvantages-of-second-mortgages
Compare Mortgage Rates
Compare rates from up to 4 lenders for mortgage
Second mortgage defined
In many ways, a second mortgage is a duplicate of your first. It's a loan secured against your house, and the interest you pay is tax deductible. The difference occurs in the event that you default on your loan. The lender who holds the primary mortgage is the first to receive any funds recovered from the defaulted loan. The second mortgage lender is next in line. Because second mortgages are a slightly riskier proposition for lenders, they're generally tagged with higher interest rates.
Versatility galore
If you've built up quite a bit of equity in your home, a second mortgage allows you to tap large sums of money at one time. How you use the funds is entirely your decision. Typical uses include home improvements, paying for college, debt consolidation, and even paying for private mortgage insurance.
A walk on the dark side
All the plusses of having a loan secured against your house can turn into a huge minus if you fail to make your mortgage payment. A bank could foreclose on your home if you default on this loan and your primary mortgage.
That's the worst-case scenario, but there are even more potential disadvantages. Late payments can include hefty fees and serious blights to your credit report. And while second mortgage interest rates generally beat the rates of credit cards, they're generally higher than first mortgage rates.
There's plenty to celebrate about second mortgages but, like seconds at the dinner table, they can also get you sick to your stomach if you can't handle the extra load. Whether it's digesting a meal or digesting a mortgage loan, make sure that you have the stomach for it.
Start here to compare mortgage rates from top lenders in our network.
http://www.mortgageloan.com/disadvantages-of-second-mortgages
Refinancing: Debts and Taxes
In the 19th century, Sherlock Holmes relied on impressive observational skills and shrewd reasoning to solve the most complex of mysteries. Holmes' brilliance was never applied to mortgage-related tax deductions, but surely he could have unraveled that case, as well. The famous detective always moved deliberately, approaching each new mystery with a closer look at the facts.
Whether you have an original mortgage or refinanced mortgage, there are three main tax deductions associated with home ownership: mortgage interest, real estate taxes, and points paid. The tax facts relevant to refinanced mortgages are discussed below.
Mortgage Interest
Generally speaking, the interest on a refinanced mortgage is tax deductible. Exceptions arise for homeowners who refinance to cash out equity, and then use the equity-related funds for something other than improving their home. In this situation, only the interest on a maximum of $100,000 of the equity debt is tax-deductible. Here's an example:
You refinance your original $125,000 mortgage for $300,000. The extra $175,000 goes towards vacations, new cars, and other discretionary spending. You can deduct the interest related to the $125,000 refinanced from the first mortgage, and $100,000 of the new equity debt. The interest on the remaining $75,000 would not be tax deductible.
Real Estate Taxes
Real estate taxes are deductible in the year they are paid to the property tax collector. You cannot immediately deduct monies put into escrow for future property taxes; that expense would be deducted later on, in the same year those funds are applied to your property tax liability.
Points
Points paid on a refinance mortgage are, in most cases, deducted proportionately over the life of the loan. That said, points might be fully deductible in the first year if the refinance is used to fund home improvements. You must meet specific requirements to qualify for this deduction, so please check with your tax advisor.
The case isn't closed just yet. Just as Sherlock Holmes outlines his conclusions with trusty Dr. Watson, you should discuss the details of your deductions with a qualified tax advisor. Once you do, you'll see that they, too, are elementary.
http://www.mortgageloan.com/refinancing-debts-and-taxes
Whether you have an original mortgage or refinanced mortgage, there are three main tax deductions associated with home ownership: mortgage interest, real estate taxes, and points paid. The tax facts relevant to refinanced mortgages are discussed below.
Mortgage Interest
Generally speaking, the interest on a refinanced mortgage is tax deductible. Exceptions arise for homeowners who refinance to cash out equity, and then use the equity-related funds for something other than improving their home. In this situation, only the interest on a maximum of $100,000 of the equity debt is tax-deductible. Here's an example:
You refinance your original $125,000 mortgage for $300,000. The extra $175,000 goes towards vacations, new cars, and other discretionary spending. You can deduct the interest related to the $125,000 refinanced from the first mortgage, and $100,000 of the new equity debt. The interest on the remaining $75,000 would not be tax deductible.
Real Estate Taxes
Real estate taxes are deductible in the year they are paid to the property tax collector. You cannot immediately deduct monies put into escrow for future property taxes; that expense would be deducted later on, in the same year those funds are applied to your property tax liability.
Points
Points paid on a refinance mortgage are, in most cases, deducted proportionately over the life of the loan. That said, points might be fully deductible in the first year if the refinance is used to fund home improvements. You must meet specific requirements to qualify for this deduction, so please check with your tax advisor.
The case isn't closed just yet. Just as Sherlock Holmes outlines his conclusions with trusty Dr. Watson, you should discuss the details of your deductions with a qualified tax advisor. Once you do, you'll see that they, too, are elementary.
http://www.mortgageloan.com/refinancing-debts-and-taxes
Cash in on the Refinancing Boom
At the beginning of January 2007, the number of mortgage refinance applications spiked, thanks to a sudden drop in mortgage interest rates. But interestingly, when interest rates rise, many homeowners also refinance while there's still time to lock in low rates. Whichever direction mortgage rates move, consumer activity seems to accelerate. The reason: people want to capture available discounts while they last.
These questions will help you determine if a refinance is right for you:
How long will you keep the loan?
If you plan to hold on to the loan for several years, shop for a refinance rate that saves you money both now and into the future. Fixed rate loans are especially popular now, because their rates are still near historic lows and will stay predictable, even during times of mortgage market uncertainty.
Do you need to raise cash?
A cash-out refinance can put money in your pocket at rates that are lower than typical consumer loans. While the interest paid on consumer loans is not tax deductible, interest -as well as points paid at closing, in most cases-is deductible, and can provide further financial justification for refinancing.
Do you have untapped equity?
If you have equity in your home that could be used for a higher return elsewhere, use a mortgage refinance to take it out and put it where it really counts. For example, some financial advisors suggest using home equity loans to tap money that can then be invested in high-yield stocks. This can be a clever tactic for baby boomers needing aggressive wealth-building strategies prior to a retirement that looms just around the corner.
Is your current loan too expensive?
A refinance to a conventional loan is the ticket if you have an interest-only loan and want to avoid negative amortization. If you have an ARM that has adjusted-or is about to-and you want to avoid its higher monthly payments, you can refinance into a more comfortable fixed-rate product.
Instead of riding the stressful minute-to-minute mortgage rate roller coaster, crunch the numbers calmly and see if-and how-mortgage refinancing might be able to save you money in the New Year and beyond.
http://www.mortgageloan.com/cash-in-on-the-refinancing-boom
These questions will help you determine if a refinance is right for you:
How long will you keep the loan?
If you plan to hold on to the loan for several years, shop for a refinance rate that saves you money both now and into the future. Fixed rate loans are especially popular now, because their rates are still near historic lows and will stay predictable, even during times of mortgage market uncertainty.
Do you need to raise cash?
A cash-out refinance can put money in your pocket at rates that are lower than typical consumer loans. While the interest paid on consumer loans is not tax deductible, interest -as well as points paid at closing, in most cases-is deductible, and can provide further financial justification for refinancing.
Do you have untapped equity?
If you have equity in your home that could be used for a higher return elsewhere, use a mortgage refinance to take it out and put it where it really counts. For example, some financial advisors suggest using home equity loans to tap money that can then be invested in high-yield stocks. This can be a clever tactic for baby boomers needing aggressive wealth-building strategies prior to a retirement that looms just around the corner.
Is your current loan too expensive?
A refinance to a conventional loan is the ticket if you have an interest-only loan and want to avoid negative amortization. If you have an ARM that has adjusted-or is about to-and you want to avoid its higher monthly payments, you can refinance into a more comfortable fixed-rate product.
Instead of riding the stressful minute-to-minute mortgage rate roller coaster, crunch the numbers calmly and see if-and how-mortgage refinancing might be able to save you money in the New Year and beyond.
http://www.mortgageloan.com/cash-in-on-the-refinancing-boom
Thursday, May 17, 2007
How Do Option ARM Mortgages Work?
Option ARM mortgages give you flexibility that is unmatched by virtually any other home loan product available in today's market. Option ARM mortgages offer low adjustable interest rates with the security of a fixed minimum payment. In fact, you have four different payment options each month with an Option ARM, allowing you to choose the payment that best fits your needs at anytime.
If your budget is a bit tight, you can choose to make the interest–only payment or the minimum payment––two payments that are lower than a standard mortgage payment. In months when your budget is not so tight, you can use the extra money toward saving for retirement, paying off high–interest debt, making home repairs, or financing college expenses. The choice is yours.
Option ARM Mortgages — Your Month–to–Month Flexibility
Minimum Payment
The minimum payment on Option ARM mortgages is the lowest of the four payment options, since it is less than the amount needed to cover the interest for the month. This is known as deferring your interest.
Generally speaking, with most Option ARM mortgages, your minimum payment may change each year, it can only increase a certain percentage of the previous year's minimum payment amount. Then every five years, your minimum payment is recalculated to help you stay on track to pay off your loan. After each recalculation, your new minimum payment will be based on your current interest rate, your unpaid principal balance and your remaining loan term. However, the payment cap will not apply.
Secure Advantage Loan - Low, adjustable rates and flexible payments each month
Interest–Only Payment
The interest–only payment on an Option ARM mortgage is the second lowest payment option and is the amount needed to repay the full interest due each month. No principal is paid down unless you choose to include an additional amount. Any additional amount on top of the amount needed to cover the interest will be applied to your principal.
30–Year Amortization Payment
The 30–year amortization payment is higher and pays down the loan faster than the minimum or interest–only payments. If you decide to make the 30–year amortization payment on your Option ARM, you're paying an amount equal to what is needed to pay off your loan in 30 years, based on the initial fixed interest rate and current loan balance.
15–Year Amortization Payment
If you decide to make the 15–year amortization payment, you're paying an amount that is needed to pay off your loan in 15 years based on the initial fixed interest rate and current loan balance. This is the highest payment available and is designed to pay down your loan faster than any other option.
Who May Benefit From Option ARM Mortgages
Flexibility alone makes an Option ARM mortgage an excellent choice for borrowers who don't have a fixed income or for people with fluctuating income-like people who work on commission or self–employed borrowers; even people who are serious investors who want to channel their money into their investments, rather than their mortgage.
Without a fixed income, it can be hard to meet a mortgage payment on time during slow months at work. Say you have a bad month of commission-sales are down; you have to fix your car; and finances are pretty tight. With an Option ARM loan, you can choose to make just the minimum payment to get you through the month, and then make a larger payment when things pick up. Having a safety net like this is much less stressful than falling behind on your mortgage payments.
But keep in mind, this type of loan is not for everyone. This is the kind of loan that is for clients that can soundly manage their finances––people who are at least somewhat knowledgeable when it comes to things like managing and investing their money. For instance, this loan might be perfect for someone who is in sales and works on commission and who knows how to get by when sales are down. This is not the kind of loan for people who may have lots of debt and are looking to only pay the minimum payment all the time.
Here's why: Your minimum payment on Option ARM loans may not fully cover the interest that accrues monthly. This is known as "deferred interest." If the minimum payment doesn't cover the entire interest owed, it gets tacked onto your loan balance which means you can get into trouble very quickly, if you don't know what you're doing. Your loan balance can actually increase as you make these low payments. You can elect to use the minimum payment as often as you like, but if used too often without making some larger payments in between, you could end up with a mortgage balance that is higher than the value of your home. Quicken Loans offers an option ARM mortgage with a minimum payment that limits how much interest is deferred. Our option ARM program calculates your minimum payment based on your interest rate minus a percentage for the first five years until it reaches the maximum deferred interest level of about 115 percent (New York 110 percent). During the first five years, your rate is fixed. After that, it becomes a six–month fully–amortizing ARM. When that happens, the loan loses its potential to be a negatively amortizing loan. If you're looking into getting an option ARM, look for one that limits the potential for deferred interest or negative amortization.
Learn More About Option ARM Mortgages
Our home loan experts can help you determine whether an Option ARM is right for your financial situation. For more information on Option ARM mortgages, call 800-251-9080 to talk to a Refinance Expert at Quicken Loans or read more about our Secure Advantage loan. You may also download the Consumer Handbook on Adjustable Rate Mortgages.
http://www.quickenloans.com/refinance/articles/option-arm.html?lid=3898
If your budget is a bit tight, you can choose to make the interest–only payment or the minimum payment––two payments that are lower than a standard mortgage payment. In months when your budget is not so tight, you can use the extra money toward saving for retirement, paying off high–interest debt, making home repairs, or financing college expenses. The choice is yours.
Option ARM Mortgages — Your Month–to–Month Flexibility
Minimum Payment
The minimum payment on Option ARM mortgages is the lowest of the four payment options, since it is less than the amount needed to cover the interest for the month. This is known as deferring your interest.
Generally speaking, with most Option ARM mortgages, your minimum payment may change each year, it can only increase a certain percentage of the previous year's minimum payment amount. Then every five years, your minimum payment is recalculated to help you stay on track to pay off your loan. After each recalculation, your new minimum payment will be based on your current interest rate, your unpaid principal balance and your remaining loan term. However, the payment cap will not apply.
Secure Advantage Loan - Low, adjustable rates and flexible payments each month
Interest–Only Payment
The interest–only payment on an Option ARM mortgage is the second lowest payment option and is the amount needed to repay the full interest due each month. No principal is paid down unless you choose to include an additional amount. Any additional amount on top of the amount needed to cover the interest will be applied to your principal.
30–Year Amortization Payment
The 30–year amortization payment is higher and pays down the loan faster than the minimum or interest–only payments. If you decide to make the 30–year amortization payment on your Option ARM, you're paying an amount equal to what is needed to pay off your loan in 30 years, based on the initial fixed interest rate and current loan balance.
15–Year Amortization Payment
If you decide to make the 15–year amortization payment, you're paying an amount that is needed to pay off your loan in 15 years based on the initial fixed interest rate and current loan balance. This is the highest payment available and is designed to pay down your loan faster than any other option.
Who May Benefit From Option ARM Mortgages
Flexibility alone makes an Option ARM mortgage an excellent choice for borrowers who don't have a fixed income or for people with fluctuating income-like people who work on commission or self–employed borrowers; even people who are serious investors who want to channel their money into their investments, rather than their mortgage.
Without a fixed income, it can be hard to meet a mortgage payment on time during slow months at work. Say you have a bad month of commission-sales are down; you have to fix your car; and finances are pretty tight. With an Option ARM loan, you can choose to make just the minimum payment to get you through the month, and then make a larger payment when things pick up. Having a safety net like this is much less stressful than falling behind on your mortgage payments.
But keep in mind, this type of loan is not for everyone. This is the kind of loan that is for clients that can soundly manage their finances––people who are at least somewhat knowledgeable when it comes to things like managing and investing their money. For instance, this loan might be perfect for someone who is in sales and works on commission and who knows how to get by when sales are down. This is not the kind of loan for people who may have lots of debt and are looking to only pay the minimum payment all the time.
Here's why: Your minimum payment on Option ARM loans may not fully cover the interest that accrues monthly. This is known as "deferred interest." If the minimum payment doesn't cover the entire interest owed, it gets tacked onto your loan balance which means you can get into trouble very quickly, if you don't know what you're doing. Your loan balance can actually increase as you make these low payments. You can elect to use the minimum payment as often as you like, but if used too often without making some larger payments in between, you could end up with a mortgage balance that is higher than the value of your home. Quicken Loans offers an option ARM mortgage with a minimum payment that limits how much interest is deferred. Our option ARM program calculates your minimum payment based on your interest rate minus a percentage for the first five years until it reaches the maximum deferred interest level of about 115 percent (New York 110 percent). During the first five years, your rate is fixed. After that, it becomes a six–month fully–amortizing ARM. When that happens, the loan loses its potential to be a negatively amortizing loan. If you're looking into getting an option ARM, look for one that limits the potential for deferred interest or negative amortization.
Learn More About Option ARM Mortgages
Our home loan experts can help you determine whether an Option ARM is right for your financial situation. For more information on Option ARM mortgages, call 800-251-9080 to talk to a Refinance Expert at Quicken Loans or read more about our Secure Advantage loan. You may also download the Consumer Handbook on Adjustable Rate Mortgages.
http://www.quickenloans.com/refinance/articles/option-arm.html?lid=3898
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