Understanding Mortgage Loans

Mortgages fall into one of two categories: Fixed rate mortgage and Adjustable rate mortgage (ARM)

Generally speaking, the question to ask is, "How long will I own this home?"

Rule of thumb states if you intend to own the home more than 10 years and want a stable monthly payment, a fixed-rate mortgage is the best choice; conversely, if you will sell the home in less than 10 years and desire a lower monthly payment, consider an ARM.

Fixed Rate Mortgages

Rates remain fixed during the life of the loan. Choose between 30, 20, 15, or 10 year terms. Generally speaking, the shorter the term is, the lower the rate will be.

Adjustable Rate Mortgages (ARM)

Rates are fixed for an initial period and later adjust. Fixed periods range from 1, 3, 5, 7, and 10 years. ARMs are tied to a rate index and contain an interest rate cap.

For example: a 5/1 ARM carries a fixed rate for (5) years and adjusts every (1) year thereafter. Typically, the rate will not increase by more than 2% in any one adjustment period and by no more than 6% over the life of the loan. Rate adjustments are tied to the treasury index at the time of an adjustment.

Loans can be structured a number of ways, all beginning with the question, "How much down payment do I have?"

Typically, a 20% down payment, or 20% equity in the case of a refinance, is necessary. Other factors influencing the down payment include: credit score, outstanding debt, and whether or not you are a first-time homebuyer.

When the down payment or equity is less than 20%, you can avoid the expense of private mortgage insurance (PMI) by utilizing one of the following loan plans:

A first mortgage is used for 80% of the property value and a second mortgage is used for 20% of the value. No cash down payment is required.

A first mortgage is used for 80% of the property value and a second mortgage is used for 10% of the value. An additional 10% is supplied as a cash down payment.

A first mortgage is used for 80% of the property value and a second mortgage is used for 15% of the value. An additional 5% is supplied as a cash down payment.

No Private Mortgage Insurance (PMI) Loan

For buyers not wanting to pay PMI, who have a 5% down payment and desire a single monthly payment. Rates are higher, but carry greater tax benefits than loans with PMI.

Other common loan types:

No Money Down
Available for buyers with no cash down payment. 100% of the loan is financed in a single mortgage with the added cost of PMI.

Interest-only mortgage
Typically used for short-term financing, interest-only loans provide interest-only payments during the early years of the loan followed by principal plus interest payments in later years. Rates can be either fixed or adjustable. Interest-only loans provide an initial low or no down payment and smaller monthly payment.

Jumbo loan
Exceeds Fannie Mae's and Freddie Mac's loan limits, currently at $359,650. Also called a nonconforming loan. Can be structured a number of ways with a fixed-rate mortgage, ARM or interest-only loan.

Mortgage loan rates may vary by loan amount, term, and availability. Until a mortgage loan rate is "locked" for a specific period of time, APR and loan terms are subject to change. Rates vary depending on property type, property location, loan amount, down payment, loan-to-value (LTV), the property's appraised value, personal credit score and owner occupying the property. ARM rates are subject to increase during loan term and vary depending upon the selected ARM. Rates assume a 20% equity position and payment of customary fees at loan closing. Interest rates are typically higher for "Jumbo" loans. Other terms and conditions may apply.

APR calculations assume a loan amount of $200,000 on a single-family owner-occupied residence with an LTV of less than 90% with 15 days of prepaid interest. Monthly payment per $1,000 calculations include principal and interest only. PMI, hazard insurance, property taxes, state taxes, mortgage taxes and any other reoccurring costs are not included. Rates may be higher for loans greater than $359,650. Closing costs assume an escrow account will be established unless otherwise specified. All loans subject to underwriter approval. Rates are subject to change without notice. Other fees and charges may apply. The Bank of Kentucky is an equal housing lender, member FDIC.