The following are the various types of mortgage loans offered by Farmers & Merchants Bank and a general description of the loan product.
Thirty-Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for adjustable rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.
Fifteen-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you'll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn't that great.
Ten-Year Fixed Rate Mortgage
A 10-year fixed mortgage is a mortgage that has a specific, fixed rate of interest that does not change for 10 years. At the end of 10 years you will have paid off your mortgage completely.
If you choose a 10-year fixed mortgage, your monthly payment will be the same every month for 10 years. However, the breakdown of how much of your mortgage payment goes to principal and how much goes to interest will shift throughout the lifetime of the loan. Your payments will be spread over 10 years, with the interest payments making up the majority of the payment at the beginning, and then principal paid off toward the end of the term.
10-year fixed mortgages have increased in popularity recently. When rates are low and you can afford the much higher monthly payment, a 10-year fixed mortgage allows you to pay off your mortgage in only 10 years, build equity at a faster rate and save thousands in interest.
Adjustable Rate Mortgages (ARM) - 3/1, 5/1, 7/1, 10/1
Adjustable-rate mortgages (ARMs) have an interest rate that may change periodically depending on changes in a corresponding financial index that’s associated with the loan. When the rate changes, generally, your monthly payment will increase if rates go up and decrease if rates fall. Most lenders today offer a “fixed-period ARM,” which features an initial fixed interest rate period, typically of 3, 5, 7 or 10 years. After the introductory fixed-rate period expires, the interest rate becomes adjustable for the remainder of the loan term. The overall term for ARM loans is 30 years. These loans are named by the length of time the interest rate remains fixed and how often the interest rate is subject to adjustment thereafter.
For example, in a 5/1 ARM, the "5" stands for a 5-year introductory period in which the interest rate remains fixed. The “1” shows the interest rate is subject to adjustment once per year after the introductory period expires.
Home Equity Line of Credit (HELOC)
A HELOC or Home Equity Line of Credit lets you draw cash as you need it up to your credit limit. The HELOC has an adjustable interest rate and therefore your monthly payments may change. Often, HELOCs allow you to pay “interest only” for an initial period which can lower your monthly payments until you are ready to pay down the HELOC’s outstanding principal balance. A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the "draw period" (typically 5 to 25 years). A HELOC may have a minimum monthly payment requirement (often "interest only"); however, the borrower may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding). The full principal amount is due at the end of the repayment period, either as a lump-sum balloon payment or according to an amortization schedule.
Balloon Loan or Mortgage
A mortgage that typically offers low rates for an initial period of time (usually 6, 7, or 10) years; after that time period elapses; the balance is due or is refinanced by the borrower.
In the United States, a five- or ten-year interest-only period is typical. After this time, the principal balance is amortized for the remaining term. In other words, if a borrower had a thirty-year mortgage loan and the first ten years were interest only, at the end of the first ten years, the principal balance would be amortized for the remaining period of twenty years. The practical result is that the early payments (in the interest-only period) are substantially lower than the later payments. This gives the borrower more flexibility because he is not forced to make payments towards principal. Indeed, it also enables a borrower who expects to increase his salary substantially over the course of the loan to borrow more than he would have otherwise been able to afford, or investors to generate cash flow when they might not otherwise be able to. During the interest-only years of the mortgage, the loan balance will not decrease unless the borrower makes additional payments towards principal. Under a conventional amortizing mortgage, the portion of a payment that represents principal is very small in the early years (the same period of time that would be interest-only).