Key Components to Most Adjustable Rate Mortgages(ARM):
Index
Rate—The rate to which the interest rate on an adjustable rate
loan is tied.One of
the more popular indexes used is the 1-year U.S. Treasury bill.
Margin—The
amount added to the index rate that represents the lender’s cost
of doing business.
Interest
Rate Cap Per Adjustment—The maximum amount a borrower’s interest
rate may increase or decrease at the time of adjustment.
Life
Cap—This is the ceiling that the note rate cannot exceed over
the life of the loan.
Amortization—A
period of time in which gradual repayment of debt occurs by means
of systematic payments of principle and/or interest.At the end of the time period the balance is zero.
Others—Convertibility
option; Pre-payment option; Payment Cap option; Deferred Amortization
What Your Monthly Mortgage Payment Consists of:
Principle
balance: this represents the money you originally borrowed and are
paying back over the life of the loan
Interest
on loan amount
Real
estate taxes: normally 1/12 of the most recent tax bill
Insurance
(Home Owners): normally 1/12 of the yearly policy amount
Private
Mortgage Insurance (PMI)—Some borrowers who have less than 20% down
are required to pay PMI.
Assessments
(if any, condo, townhome, single family home)—Depending on the type
of dwelling, you may or may not be required to pay assessments.
Monthly
payments for principle and interest remain the same over the life
of the loan
Lower
monthly payments when amortized over a 30-year payment period.
15-year
conventional fixed rate loan(also available in 10- & 20-year
payment schedules)—Benefits include:
Monthly
payments of principle and interest remain the same over the life
of the loan
Substantial
savings of interest over the life of the loan
Payments
are approximately 25-30% higher when amortized over a shorter
period of time.
No-Point/Zero
Closing Cost loan—Benefits include:
Less
cash needed at closing.The interest rate will usually be ½ to ¾ of a percent higher
when compared to loans that have points to pay at closing.
7-year fixed rate
balloon with a 30-year amortization—Benefits include:
Slightly lower
rate and/or less fees than the conventional 30-year fixed rate
loan
Payment of principle
and interest remains the same over the 7-year period of time
(at the end of 7 years, you will need to pay off the remaining
balance with either a lump sum of cash or re-finance the remaining
loan amount).
Adjustable Rate
Mortgages (ARM)—There are many options with ARMs; the most popular
tends to be the 1-year ARM with a 30-year amortization schedule.Benefits include:
Lower interest
rate for the 1st year
Easier to qualify
for the loan amount
You
can qualify for a larger loan amount
A
year ARM offers the ability to adjust downward at the 1 year
anniversary of your loan
Federal Housing
Administration (FHA)—Benefits include:
Easier to qualify
for loan programs than conventional financing
Less down payment
needed
Questions to Ask Lenders:
Based
on our situation, what looks like the best program for us?Why?
What
is the projected time for processing and closing a loan?
If
PMI (Private Mortgage Insurance) is required, when and how does
it go away?
What
about your rates, terms, fees, etc—are they negotiable?
What
standard underwriting guidelines do you follow?Are there any special underwriting guidelines?
What
is your most popular loan program?Why?
Who
services your loan?
6
months to a year from now, what will make this loan look good/bad
to most borrowers?
What
are your standard and special fees?
What,
if any, escrow requirements exist?
What
if rates go down during the “lock-in” period?
Who
is our contact person after application for progress reports?
What
do you need from us to get our loan approved?
Do
you have any concerns about our ability to get a quick loan approval?
