"Interest only" products are an easy way to save money and a very popular alternative to traditional fixed rates but they are not without risk, advise Emery Federal Credit Union’s Bankers. An "Interest Only" loan can offer consumers greater purchasing power, increased cash flow and a number of other benefits. First let us start with a quick explanation of how the product works. With Interest Only loans, the borrower has the flexibility of paying only the interest due on the mortgage. Most of these products allow you to pay extra if you choose. The positive aspects of these loans are as follows: They work well for borrowers that are restricted by a tight budget, and the savings can be as much as $300-400 per month! Interest Only loans may allow you to qualify for a bigger home. If the underwriter considers only the "Interest Only" payment, you may be able to upgrade to a nicer or larger home. This type of loan works well for people who only want to stay in a home for just a few years. During the first couple of years with a conventional 30-year mortgage, most of your mortgage payment is being applied directly to the interest of the loan. If you want to stay in the house for only 3-5 years, an "Interest Only" loan may be the right loan for you. You can receive a lower payment and have almost the same principal balance as the borrower who chose a 30-year, conventional mortgage if you choose to sell in 3-5 years. You want to buy a very expensive home. Most people who buy very expensive home have no desire to pay off their home completely, and the rate of appreciation on the house is usually very good. An "Interest Only" loan allows these borrowers to deduct their interest payments, and the money they save can be directed to other investments. You want to buy a rental property. The lower payment can help improve cash flow on a rental property. As with every loan program, with positives there are always negatives. You are not paying down your principal on your mortgage. If your property doesn't appreciate in value over those 3-5 years, you may even have to pay money if you choose to sell the home. Most "Interest Only" products have a specified term. For example, on most 30-year fixed "Interest Only" loans, most lenders allow interest payments for 10 years, and then you must repay the loan during the last 20 years. This loan now must be amortized over a 20-year period, and this will carry a higher payment than a 30-year fixed mortgage. These loans may be a good option for you as a borrower, but each person's situation is unique. Lastly, when in a period of incredibly low fixed rates, "Interest Only" products will be very attractive. But if you are planning on staying in your home for an extended period of time, you may want to consider a traditional fixed product.

Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30-year fixed rate mortgage, balloon loans do not fully amortize over the original term. At the end of the term, the entire remaining balance is due (the balloon payment).  Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. At the end of the loan term there is still a remaining principal loan balance, and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30-year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

The Federal Cost of Funds Index (COFI) is used as a benchmark for some types of mortgage (ARM) loans. It is a regional average of interest expenses incurred by financial institutions, which in turn is used as a base for calculating variable rate loans. The 11th District Cost of Funds is more prevalent in the West and the 1-Year Treasury Security is more prevalent in the East. Buyers prefer the slowly moving 11th District Cost of Funds, and investors prefer the 1-Year Treasury Security. The monthly weighted average 11th District has been published by the Federal Home Loan Bank of San Francisco since August 1981. Currently more than one half of the savings institutions loans made in California are tied to the 11th District Cost of Funds (COFI) index. The Federal Home Loan Bank's 11th District is comprised of saving institutions in Arizona, California and Nevada. The index is published on the last day of the month and reflects the cost of funds for the prior month. Few people who use and follow the 11th District Cost of Funds understand exactly how it is calculated, what it represents, how it moves and what factors affect it. This index, which varies, is used by lenders such as Emery Federal Credit Union to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. COFI usually lags market interest rates in both up and down markets. That means loans tied to this index rise and fall more slowly than rates in general.

Emery Federal Credit Union offers a few options to fit your individual needs and your risk tolerance with the various loan products. ARMs with different indices are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward. The interest rate and monthly payment can change based on adjustments to the index rate.

Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule, the lower the start rate is the shorter the time before the loan makes its first adjustment, say Emery Federal Credit Union’s Community Bankers. Index The index of an ARM is a published measure of economic conditions usually relative to other financial instruments such as Treasury notes or Treasury bills. Other common indices are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets. Margin The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. Interim Caps All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly. Payment Caps Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can allow  deferred interest or "negative amortization”. This means the payment is not sufficient to pay all of the interest due and the unpaid interest is added to the balance of the loan.  These loans generally cap your annual payment increases to 7.5% of the previous payment. Lifetime Caps Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. This is the maximum interest rate that could be charged on your loan.  Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.

These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home, say Emery Federal Credit Union’s Community Bankers.. However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also. There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed rate for seven to ten years, for example, then adjusting to market conditions. Ask your Emery Federal Credit Union Community Banker about these and other special kinds of mortgages that fit your specific financial situation.

This is the most common type of mortgage program in Ulster County, 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 "biweekly" 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.