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Welcome Mortage

Welcome Mortgage Corporation has a large variety of programs from which to choose.  How long you anticipate keeping this loan, along with your other financial goals will help determine which program is best for you.

We still sit with each of our customers to discuss their goals and options and make recommendations to meet their individual needs.  The following are a few popular program choices along with some basics about the loan.  We would be happy to talk to you in more detail.

Fixed Rates

A fixed rate mortgage is just as it implies, a rate that is fixed for the term of the loan.  Fixed rate loans most commonly come in 15 and 30 year terms, although 10, 20 and 40 and even 50 year terms are available.  Generally speaking the longer the term the higher the rate, but the lower the payment.  If you are comfortable with a 15 year payment you will save slightly on the rate and a good deal of interest over the life of the loan.  However, if you are like most borrowers, you will probably need a 30 year term to be comfortable obtaining the house you desire.  If that is the case, we will be happy to show you some payment tricks to shorten your mortgage and lower your interest payments that can be done when it works for you without the pressure of a higher required payment.  

Adjustable Rates

There are so many different types of adjustable rates it would be impossible to go over them all here.  So we will give a overview of some of the most popular products.

1 year, 3/1, 5/1, 7/1, 10/1; the first key to an adjustable is the first number.  The first number represents the amount of years the initial rate is guaranteed.  Example a 5/1 would mean that the rate you are being quoted is guaranteed for the first 5 years after that it becomes a 1 year adjustable.  With some exceptions most adjustables become 1 year adjustable after the first term expires.  So in that example your rate would be guaranteed  for the first five years and then begin adjusting annually afterward for the remaining 25 years.  

When your rate adjusts, it adjusts based on two factors, the index and the margin.  The index is what is being used to set the rate.  The most commonly used indexes are the 1 year Treasury bill or on the libor; however, other less common indexes are occasionally utilized.  Next you add the margin.  The margin is also set in advance and is part of your note at closing.  This is the number that is added to the index at each change to come up with the rate you will pay for the up coming year.  Since the indexes can change greatly from year to year almost all adjustable mortgages have what are called Caps.  

A Cap is a maximum that the rate can change or go up.  Common caps are 2/6.  In that example, your rate could not exceed 2% above your start rate at the first change and only increase 2% for each simultaneous change.  The 6 represents the life cap.  No matter how long you keep the loan or how high rates go with that example, your rate could never be any higher than 6% above the start rate.  It is just as important to know the index, margin and caps as the start rate on an adjustable mortgage if there is ANY chance you will still have the mortgage at the first rate change.  

There are many new popular adjustable with much riskier terms.  Many lenders have done a great deal of business the last few years with loans quoting rates at 1 ¼ or 1 ¾  %  and some up to 4%.  These are not the interest rate you are being charged, just the one your payment is based on.  You are only required to make payments based on 1 ½% but what you are really being charged right now is close to 8% or over.  The payment does not cover the actual interest, so the remainder of the payment goes to the end of the loan.  This is called negative amortization and can be quite risky.  Should you make the minimum payment required on this loan you could owe tens of thousands of dollars more than you initially borrowed after a few years.  It is very important to understand the terms of your adjustable rate loan and work with a lender that you trust.

Interest Only

An Interest Only loan is again just as it sounds – a loan where you are required to pay interest only.  No principal is required to be repaid, usually for the first 10 years.  This can lower your payment without the risk of a higher monthly adjusting rate and without the possibility of negative amortization.  However, again , if you don’t add principle at any point your loan will have the same balance after a few years as it did the day you closed.   

This sometimes is a good option for those who work on a smaller salary with guaranteed bonus—they can make the lower payment throughout the year and then throw a chunk of principle into the loan when they receive their bonus.  

Interest Only loans are available with a 30 year fixed rate or as an adjustable, and in most cases, after the first 10 years you will be required to pay principle in your payments.
Another advantage to this loan is the borrower who intends to pay a large sum toward principle at some point in the first 10 years.  Unlike a fixed rate mortgage, if you prepay principle on this loan your payment will decrease.  If you prepay 100,000 on a 200,000 fixed rate mortgage your payment does not change just the length of time you need to make the payments.  If you do that on a interest only loan, your payment will be recalculated based on the new loan amount.  

Conforming VS Jumbo

A conforming loan amount is a loan to $417,000.  Loans above that amount are called jumbo loans.  Fannie Mae and Freddie Mac are the largest purchasers of conforming loans.  Most standard loans below $417,000 are underwritten to their criteria and priced by mortgage backed securities.  

Loans over $417,000 are not bought by these entities and are sold usually in “pools” to private investors.  The difference to the consumers is occasionally different documentation requirements and usually a slightly higher rate for a jumbo loan.  

FHA / VA 

FHA/VA are government issued loans.  Generally you are looking at similar rates as conforming loans but with different underwriting guidelines.  Just as standard lenders require mortgage insurance known as PMI, the government collects insurance called MIP for FHA and funding fee for VA.  This insurance goes into a pool to guarantee payment to the lender in case of default.  Because of this, underwriting guidelines are more liberal.  A borrower can purchase with very little or no money down and credit guidelines are eased.  

There are loan limits and property requirements so this loan isn’t right for everyone but they are excellent loans for many needs.  

80 / 10 / 10’s

Very popular today are combinations loans.  These loans originated primarily for borrowers who do not have the 20% to put down to avoid mortgage insurance (PMI).  They work by giving you a first mortgage of 80% of the sales price and making up the difference between the 80% with the down payment and the purchase price.  

The first number, in this case 80 is the percentage of the first loan.  Using a $100,000 sales price for example, the first loan would be $80,000, then the second number is the second mortgage or home equity line of credit, in this case $10,000.  The last number is the borrower’s down payment.  If you only have 5% to put down it would be a 80/15/5 or no down payment would be a 80/20.  Doing it this way is sometimes less expensive than paying mortgage insurance.

Second Mortgages / HELOC’s

A second mortgage is a loan in second place on title.  It generally follows a first mortgage and is in second position to be paid in the event of a foreclosure.  Because the equity position comes with more risk, you will find higher rates on second mortgages.  Unlike first mortgages, pricing for a second mortgage or HELOC can be soley based on your credit score and equity in the property as well as the loan amount.  A fixed second mortgage is a fixed rate for a specified term just like the first mortgage fixed.

HELOC’s are mortgages, generally in second place position that are Home Equity Lines of Credit.  Unlike a fixed second, where the payment and rate never change, a HELOC usually fluctuates.  They often only require an interest only payment and are based in price relative to prime.  A HELOC is a line of credit for which you are approved but can use like a check when you need it.  You only pay interest when you have a balance.  The benefit of a HELOC is that you can draw on it and pay it off as you like not paying interest when it is not in use.  The drawback is that most HELOCS are adjustable rates and can fluctuate with prime.

Reverse

A reverse mortgage is a loan for borrowers 62 and older with equity in their home.  These loans work in “reverse” of the others we have talked about with the lender making payments or a lump sum to the applicant with no payment required from them. Please see our section of Reverse Mortgages for many more details.  



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