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Fixed Rate
Mortgages
The most common type of mortgage program
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 "bi-weekly" 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.
Adjustable Rate
Mortgages
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.
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 mortgage professional about these and other special kinds of
mortgages that fit your specific financial situation.
Standard
ARM Programs
A few options are available to fit your
individual needs and your risk tolerance with the various market
instruments.
ARMs with different indexes 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.
6-Month Certificate of Deposit (CD)
ARM
Has a maximum interest rate adjustment of 1% every six months. The
6-month Certificate of Deposit (CD) index is generally considered to
react quickly to changes in the market.
1-Year Treasury Spot ARM
Has a maximum interest rate adjustment of 2% every 12 months. The
1-Year Treasury Spot index generally reacts more slowly than the CD
index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
Has a maximum interest rate adjustment of 1% every six months. The
Treasury Average index generally reacts more slowly in fluctuating
markets so adjustments in the ARM interest rate will lag behind some
other market indicators.
12-Month Treasury Average ARM
Has a maximum interest rate adjustment of 2% every 12 months. The
treasury Average index generally reacts more slowly in fluctuating
markets so adjustments in the ARM interest rate will lag behind some
other market indicators.
Introductory
Rate ARM's
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 the shorter the time before the loan makes its
first adjustment.
Index - The index of an
ARM is the financial instrument that the loan is "tied" to, or
adjusted to. The most common indices, or, indexes 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 also lead to
deferred interest or "negative amortization". 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.
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.
Reverse Mortgage
A reverse mortgage is a special type of
loan made to older homeowners to enable them to convert the equity
in their home to cash to finance living expenses, home improvements,
in-home health care, or other needs.
With a reverse mortgage, the payment stream is "reversed." That is,
payments are made by the lender to the borrower, rather than monthly
repayments by the borrower to the lender, as occurs with a regular
home purchase mortgage.
A reverse mortgage is a sophisticated financial planning tool that
enables seniors to stay in their home -- or "age in place" -- and
maintain or improve their standard of living without taking on a
monthly mortgage payment. The process of obtaining a reverse
mortgage involves a number of different steps.
The first, most widely available reverse mortgage in the United
States was the federally-insured Home Equity Conversion Mortgage (HECM),
which was authorized in 1987.
A reverse mortgage is different from a home equity loan or line of
credit, which many banks and thrifts offer. With a home equity loan
or line of credit, an applicant must meet certain income and credit
requirements, begin monthly repayments immediately, and the home can
have an existing first mortgage on it. In addition, there is no
restriction on the age of borrowers.
In general, reverse mortgages are limited to borrowers 62 years or
older who own their home free and clear of debt or nearly so, and
the home is free of tax liens.
Borrowers usually have a choice of receiving the proceeds from a
reverse mortgage in the form of a lump-sum payment, fixed monthly
payments for life, or line of credit. Some types of reverse
mortgages also allow fixed monthly payments for a finite time
period, or a combination of monthly payments and line of credit. The
interest rate charged on a reverse mortgage is usually an adjustable
rate that changes monthly or yearly. However, the size of monthly
payments received by the senior doesn't change.
Some reverse mortgage products also involve the purchase of an
annuity that can assure continued monthly income to the senior
homeowner even after they sell the home.
The size of reverse mortgage that a senior homeowner can receive
depends on the type of reverse mortgage, the borrower's age and
current interest rates, and the home's property value. The older the
applicant is, the larger the monthly payments or line of credit.
This is because of the use of projected life expectancies in
determining the size of reverse mortgages.
Seniors do not have to meet income or credit requirements to qualify
for a reverse mortgage.
Unlike a home purchase mortgage or home equity loan, a reverse
mortgage doesn't require monthly repayments by the borrower to the
lender. A reverse mortgage isn't repayable until the borrower no
longer occupies the home as his or her principal residence.
This can occur if the sole remaining borrower dies, the borrower
sells the home, or the borrower moves out of the home, say, to a
nursing home.
The repayment obligation for a reverse mortgage is equal to the
principal balance of the loan, plus accrued interest, plus any
finance charges paid for through the mortgage. This repayment
obligation, however, can't exceed the value of the home.
The loan may be repaid by the borrower or by the borrower's family
or estate, with or without a sale of the home. If the home is sold
and the sale proceeds exceed the repayment obligation, the excess
funds go to the borrower or borrower's estate. If the sales proceeds
are less than the amount owed, the shortfall is usually covered by
insurance or some other party and is not the responsibility of the
borrower or borrower's estate. In general, the repayment obligation
of the borrower or borrower's estate can't exceed the value of the
property.
In general, a borrower can't be forced to sell their home to repay a
reverse mortgage as long as they occupy the home, even if the total
of the monthly payments to the borrower exceeds the value of the
home.
LIBOR
LIBOR, London InterBank Offered Rate, is
the rate on dollar-denominated deposits, also know as Eurodollars,
traded between banks in London. The index is quoted for one month,
three months, six months as well as one-year periods.
LIBOR is the base interest rate paid on deposits between banks in
the Eurodollar market. A Eurodollar is a dollar deposited in a bank
in a country where the currency is not the dollar. The Eurodollar
market has been around for over 40 years and is a major component of
the International financial market. London is the center of the
Euromarket in terms of volume.
The LIBOR rate quoted in the Wall Street Journal is an average of
rate quotes from five major banks. Bank of America, Barclays, Bank
of Tokyo, Deutsche Bank and Swiss Bank.
The most common quote for mortgages is the 6-month quote. LIBOR's
cost of money is a widely monitored international interest rate
indicator. LIBOR is currently being used by both Fannie Mae and
Freddie Mac as an index on the loans they purchase.
LIBOR is quoted daily in the Wall Street Journal's Money Rates and
compares most closely to the 1-Year Treasury Security index.
Balloon
Mortgages
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. 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.
Buydown Options
The most common buydown is the 2-1
buydown. In the past, for a buyer to secure a 2-1 buydown they would
pay 3 points above current market points in order to pay a below
market interest rate during the first two years of the loan. At the
end of the two years they would then pay the old market rate for the
remaining term.
As an example, if the current market rate for a conforming fixed
rate loan is 8.5% at a cost of 1.5 points, the buydown gives the
borrower a first year rate of 6.50%, a second year rate of 7.50% and
a third through 30th year rate of 8.50% and the cost would be 4.5
points. Buydown were usually paid for by a transferring company
because of the high points associated with them.
In today's market, mortgage companies have designed variations of
the old buydowns rather than charge higher points to the buyer in
the beginning they increase the note rate to cover their yields in
the later years.
As an example, if the current rate for a conforming fixed rate loan
is 8.50% at a cost of 1.5 points, the buydown would give the buyer a
first year rate of 7.25%, a second year rate of 8.25% and a third
through 30th year rate of 9.25% , or a three-quarter point higher
note rate than the current market and the cost would remain at 1.5
points.
Another common buydown is the 3-2-1 buydown which works much in the
same ways as the 2-1 buydown, with the exception of the starting
interest rate being 3% below the note rate. Another variation is the
flex-fixed buydown programs that increase at six month interval
rather than annual intervals.
As an example, for a flex-fixed jumbo buydown at a cost of 1.5
points, the first six months rate would be 7.50%, the second six
months the rate would be 8.00%, the next six months rate would be
8.50%, the next six months rate would be 9.00%, the next six months
the rate would be 9.50% and at the 37th month the rate would reach
the note rate of 9.875% and would remain there for the remainder of
the term. A comparable jumbo 30 year fixed at 1.5 points would be
8.875%.
COFI ARM Cost of
Funds Index
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 Eleventh 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 (COF)
index.
The Federal Home Loan Bank's 11th District is comprised of saving
institutions in Arizona, California and Nevada.
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.
The predecessor to the 11th District Cost of Funds index was the
District semiannual weighted average cost of funds published for a
six month period ending in June and December. The San Francisco Bank
was the first Federal Home Loan Bank to publish a monthly cost of
funds index.
The funds used as a basis for the calculation of the 11th District
Cost of Funds index are the liabilities at the District savings
institutions: money on deposit at the institutions, money borrowed
from a Federal Home Loan Bank (known as advances) and all other
money borrowed. The interest paid on these types of funds is the
cost of these funds.
The ratio of the dollar amount paid in interest during the month to
the average dollar amount of the funds for that month constitutes
the weighted average cost of funds ratio for that month.
The average cost of funds is said to be weighted because the three
kinds of funds and their costs are added together before a ratio is
computed rather than calculating averages individually for the three
sources and using a simple average of the three ratios. This gives
the greatest weight to the interest paid on deposits, and explains
the delayed reaction of the index to rising fixed-rate mortgages
Graduated
Payment Mortgage
The GPM is another alternative to
the conventional adjustable rate mortgage, and is making a comeback
as borrowers and mortgage companies seek alternatives to assist in
qualify for home financing
Unlike an ARM, GPMs have a fixed note rate and payment schedule.
With a GPM the payments are usually fixed for one year at a time.
Each year for five years the payments graduate at 7.5% - 12.5% of
the previous years payment.
GPMs are available in 30 year and 15 year amortization, and for both
conforming and jumbo loans. With the graduated payments and a fixed
note rate, GPMs have scheduled negative amortization of
approximately 10% - 12% of the loan amount depending on the note
rate. The higher the note rate the larger degree of negative
amortization. This compares to the possible negative amortization of
a monthly adjusting ARM of 10% of the loan amount. Both loans give
the consumer the ability to pay the additional principal and avoid
the negative amortization. In contrast, the GPM has a fixed payment
schedule so the additional principal payments reduce the term of the
loan. The ARMs additional payments avoid the negative amortization
and the payments decrease while the term of the loan remains
constant.
The scheduled negative amortization on a GPM differs depending on
the amortization schedule, the note rate and the payment increases
of the loan. GPM loans with 7.5% annual payment increases offer the
lowest qualifying rate but the largest amount of negative
amortization.
On a loan of $150,000, with a 30 year amortization and a note rate
of 10.50% with 12.5% annual payment increases, the negative
amortization continues for 60 months. The qualifying rate is 5.75%
and the negative amortization is 11.34% (approximately $17,010).
The note rate of a GPM is traditionally .5% to .75% higher than the
note rate of a straight fixed rate mortgage. The higher note rate
and scheduled negative amortization of the GPM makes the cost of the
mortgage more expensive to the borrower in the long run. In
addition, the borrowers monthly payment can increase by as much as
50% by the final payment adjustment.
The lower qualifying rate of the GPM can help borrowers maximize
their purchasing power, and can be useful in a market with rapid
appreciation. In markets where appreciation is moderate, and a
borrower needs to move during the scheduled negative amortization
period they could create an unpleasant situation.
FHA
Mortgage Loans
Down
Payment Gifts
The down payment can be 100% gift funds.
This is one of the key benefits to the FHA program.
Verification of the source of gift money is not required. However,
it is necessary that the gift funds be deposited in the borrower's
bank or savings account, or in an escrow account, prior to
underwriting approval. Proof of deposit is required.
Gift donors are restricted primarily to a relative of the borrower.
They can also be certain organizations, such as a labor union or
charitable organization. Contact your local branch for complete
information
Bankruptcy
and Foreclosure
A credit report will be obtained on the
borrower and any lates, collections, judgments, foreclosures,
bankruptcies, etc. must have a justifiable explanation in writing by
the borrower.
In the event of a foreclosure, the borrower has three years from the
date the claim was paid until he/she is eligible for another FHA
loan, unless the foreclosure was the result of extenuating
circumstances beyond the borrower's control and the borrower has
since established good credit.
Chapter 7 bankruptcy requires the borrower to wait at least two
years from the date of discharge.
Chapter 13 bankruptcy requires the borrower to have been paying on
the bankruptcy for at least one year, performance must have been
satisfactory and the borrower must also receive court approval to
enter into the mortgage transaction
FHA Mortgage
Insurance
FHA requires a mortgage insurance
premium (MIP) for its homebuying programs. An up-front premium of
1.50% of the loan amount is paid at closing and can be financed into
the mortgage amount. In addition, there is a monthly MIP amount
included in the PITI of .50%. Condos do not require up front MIP -
only monthly MIP.
The mortgage insurance premium paid on an FHA loan is always
significantly higher than on a conventional program. On an FHA loan
the borrower will be charged a mortgage insurance premium equal to
1.50% of the purchase price of the property and a renewal premium of
.500% in subsequent years. By contrast the mortgage insurance
premium charged at closing on a conventional program is as low as
.500% (with 10% down payment) with renewal rate in subsequent years
as low as .300% in subsequent years
Refunds on FHA Loans
If you have ever paid off a home loan
backed by FHA, you may have money owed to you. And the government
wants to pay you back.
About 1 in 10 FHA borrowers leave money in their escrow accounts
when they pay off their loans. The average refund for each borrower
is about $700.
Former FHA borrowers who think they might be due a refund can call a
toll free number, 800-697-6967, or write HUD at P.O. Box 23669,
Washington DC 20026-3699.
Streamline
Refinancing for FHA Mortgages
FHA has permitted streamline refinances
on insured mortgages since the early 1980's. The streamline refers
only to the amount of documentation and underwriting that needs to
be performed by the mortgage company, and does not mean that there
are no costs involved in the transaction.
The basic requirements of a streamline refinance are:
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The
mortgage to be refinanced must already be FHA insured.
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The
mortgage to be refinanced should be current (not delinquent).
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The
refinance is to result in a lowering of the borrower's monthly
principal and interest payments.
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No
cash may be taken out on mortgages refinanced using the streamline
refinance process.
Companies may offer streamline
refinances in several ways. Some companies offer "no cost"
refinances (actually, no out-of-pocket expenses to the borrower) by
charging a higher rate of interest on the new loan than if the
borrower financed or paid the closing costs in cash. From this
premium, the company pays any closing costs that are incurred on the
transaction.
Companies may offer streamline refinances and include the closing
costs into the new mortgage amount. This can only be done if there
is sufficient equity in the property, as determined by an appraisal.
Streamline refinances can also be done without appraisals, but the
new loan amount cannot exceed what is currently owed, i.e., closing
costs may not be added to the new mortgage with those costs either
paid in cash or through the premium rate as described above.
Investment properties (properties in which the borrower does not
reside in as his or her principal residence) may only be refinanced
without an appraisal and, thus, closing costs may not be included in
the new mortgage amount. |
First Time Home Buyers