What kind of lender is “best?”

If you talk to a loan officer, he (or she) will probably say the lender they work for is “the best” and give you a list of reasons why. If you meet the same loan officer years later and he works for a different kind of lender, he will give you a list of reasons why that type of lender is better.

Realtors have differing opinions and, as a group, their opinions have changed over time. In the past, most would often recommend portfolio lenders – because they almost always closed the deal. As time passed, mortgage bankers and mortgage brokers became more important, and agents switched along with the changing times.

Most often a Realtor will direct you to a specific loan officer who has demonstrated a track record of service and reliability — or a loan officer who works for a lender affiliated with their real estate office.

It is often more important to choose a good loan officer, not the institution. Loan officers have two jobs. One is to be your advocate in getting the loan approved. The other is to deliver quality loans. You want someone who has proven dependable and ethical in the past — someone you can trust.

As for lending institutions, each type of lender has strengths and weaknesses. Quality within each branch or office can vary, depending on the loan officer, the support staff, and a variety of other factors.

by Terry Light and RealEstate ABC

by Terry Light and RealEstate ABC

It used to be fairly easy to put a term to a lender that accurately described them and the types of mortgages they originated. Time, the S&L problems of the late eighties, and a maturing marketplace have served to “blend” those differences. Some old adjectives barely apply now and are rarely used.

Mortgage Bankers

A true Mortgage Banker is a lender that is large enough to originate loans and create pools of loans which they sell directly to Fannie Mae, Freddie Mac, Ginnie Mae, jumbo loan investors, and others. Any company that does this is considered to be a mortgage banker. They can very greatly in size. Some may service the loans they originate, but not all of them will. Most true mortgage bankers have wholesale lending divisions.

Examples of two of the largest mortgage bankers are Countrywide Home Loans and Wells Fargo Mortgage. One is associated with a bank and the other is not, but both are most correctly classified as mortgage bankers.

A lot of companies call themselves mortgage bankers and some deserve the title. For others, it is mostly marketing.

Mortgage Brokers

Mortgage Brokers are companies that originate loans with the intention of brokering them to wholesale lending institutions. A broker has established relationships with these companies. Underwriting and funding takes place at the wholesale lender. Many mortgage brokers are also correspondents, which is why many of them also claim to be mortgage bankers.

Mortgage brokers deal with lending institutions that have a wholesale loan department.

Wholesale Lenders

Most mortgage bankers and portfolio lenders also act as wholesale lenders, catering to mortgage brokers for loan origination. Some wholesale lenders do not even have their own retail branches, relying solely on mortgage brokers for their loans.

These wholesale divisions offer loans to mortgage brokers at a lower cost than their retail branches offer them to the general public. The mortgage broker then adds on his fee. The result for the borrower is that the loan costs about the same as if he obtained a loan directly from a retail branch of the wholesale lender.

By Terry Light and RealEstate ABC

Debt-to-Income Ratios

To determine your maximum mortgage amount, lenders use guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. Because there are two calculations, there is a “front” ratio and a “back” ratio and they are generally written in the following format: 33/38.

The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt.

A common guideline for debt-to-income ratios is 33/38. A borrower’s housing costs consume thirty-three percent of their monthly income. Add their monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of their monthly income to meet those obligations.

The guidelines are just guidelines and they are flexible. If you make a small down payment, the guidelines are more rigid. If you have marginal credit, the guidelines are more rigid. If you make a larger down payment or have sterling credit, the guidelines are less rigid. The guidelines also vary according to loan program. FHA guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.

Example: If you make $5000 a month, with 33/38 qualifying ratio guidelines, your maximum monthly housing cost should be around $1650. Including your consumer debt, your monthly housing and credit expenditures should be around $1900 as a maximum.

What to know about this non-traditional way of financing a home purchase

By Lisa Rogak

With credit tight, the housing market glutted, sellers desperate and bargains to be had, more homebuyers and sellers are considering the idea of having all or part of the purchase price of a house financed by the owner. There are pros and cons for buyers and sellers, so here’s the scoop.

Why Seller Financing Now?

“Changes in the market make seller financing very attractive for both buyers and sellers,” says Todd Huettner, a Denver-based mortgage broker. “Many buyers can no longer qualify for an affordable loan, and sellers can be more competitive in a crowded market by offering buyers the option.”

As the economic downturn continues, owner financing will only increase, says Elizabeth Weintraub, homebuying columnist at About.com and a Sacramento real estate agent. “Without a good credit score, buyers are locked out of a mortgage, and many conventional loans now require a down payment of 20 percent of the purchase price,” she says, adding that when interest rates reached 18 percent in the late 1970s and early 1980s, owner financing was often the only game in town.

Advantages of Seller Financing

For buyers:

• It helps alleviate the need for jumbo loans that can hamstring a buyer, says Jamie Katz of J. Edward Company, a real estate firm in St. Paul, Minn.;
• Seller financing can also cover closing costs, which require ready cash that some buyers lack;
• It allows a buyer to purchase a house when there are no other financing options.

For sellers:

• Owners can move a property more quickly;
• A seller can often get a better return on his/her investment than other assets would generate;
• A house becomes more attractive to buyers if they don’t have to worry about obtaining financing.

For everyone involved in a home sale, and the market as a whole:

• The deal can close more quickly;
• A sale means one less vacant house in the neighborhood, which enhances the value of the home and the neighborhood;
• It keeps a house out of foreclosure, which is expensive and can take up to a year to complete.

Disadvantages of Seller Financing

For buyers:

• The seller may not report to the credit bureaus, meaning that timely payments don’t necessarily improve a buyer’s credit score.

For sellers:

• Money is still tied up in real estate;
• The seller is paid over the length of the mortgage instead of in one lump sum;
• If the buyer defaults, the seller is left holding the bag.

Firsthand Experience

Thomas Mirabella decided to offer seller financing in July 2003 to a buyer for his home in Long Island, N.Y. He wanted to diversify his investment portfolio and produce monthly income over a period of time. “Assuming you have a qualified mortgagee, the return is better than interest in a money market or high-yield savings account or a CD,” he said. Mirabella and the buyer agreed to a 30-year fixed-rate mortgage (similar to bank terms)and he has generally been pleased with the results.

When Michael Soon Lee of Dublin, Calif., decided to buy a house in the mid-1990s, he could have gone to a bank, but instead he opted for owner financing. He received an interest rate that was 2 percent below the standard rate at the time for a seven-year, interest-only loan, and he didn’t have to pay any bank fees, which would have cost him an additional $7,200 on top of the loan amount. “It was much faster than going to a conventional lender,” Lee said, adding that he probably would not have qualified for a conventional loan since he owned too many investment properties at the time.

Is Seller Financing Right for You?

There’s no question that the seller assumes more of a risk than the buyer when it comes to owner financing. If you want to sell your home and are thinking about offering financing to a potential buyer, but you’re nervous about the prospect, consider your circumstances.

“Some sellers go for owner financing if they have equity in a house but need to sell because they can no longer afford to keep it,” says Kerry Gelbard, a senior loan consultant with L.A. Mortgage in Encino, Calif. Although it may be risky (after all, even creditworthy owners are defaulting these days), it may be better to run the risk of holding a defaulted loan than losing your home and remaining equity to foreclosure. “Don’t make the loan unless it is a property that you want to own,” he cautions.

Whether you’re a buyer or seller, have an experienced real estate attorney review all documents. As is the case with everything, especially with something as sizable as a real estate investment, proceed with eyes wide open and know the ramifications of your decision before you sign on the dotted line.

Conforming Loan

A loan in which the amount borrowed is less than or equal to $417,000.

Jumbo Loan

A loan in which the amount borrowed is more than $417,000.

30 Year Fixed

This type of loan has 360 monthly payments that remain the same for the entire 30 year period after which time the loan is paid in full. The monthly payment is based on an interest rate which does not change over the term of the loan (hence the term “fixed rate”).

20 Year Fixed

This type of loan is the same as the 30 year fixed rate loan except the life of the loan is 240 months as opposed to 360 months. Since the loan is being paid slightly faster than the 30 year fixed rate loan, monthly payments for this type loan are higher than the 30 year fixed rate loan.

15 Year Fixed

This type of loan is the same as the 30 year fixed rate loan except the life of the loan is 180 months as opposed to 360 months. Since the loan is being paid faster than either the 30 year fixed rate loan or the 20 year fixed rate loan, monthly payments for this type loan are higher than the other two loans.

Generally, the longer a lender agrees to keep the interest rate “fixed”, the greater the risk to the lender, therefore, in most instances, interest rates on 15 year fixed rate loans are slightly lower than on 20 or 30 year fixed rate loans.

5 Year Balloon

This type of loan has fixed monthly payments for the term of the loan (five years) that are based on a 30 year repayment schedule. At the end of the five year term, the outstanding principal balance of the loan is due plus any unpaid interest.

This loan program generally has a refinance option at the end of the five year period that gives the borrower the option to extend the loan at a fixed rate for the remaining 25 years. The new interest rate is based upon fluctuations in an index (typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index (typically .625% – 1.25%). For example, if the index equals 7.0% at the time of the extension of the loan and the margin is 1.00%, the new interest rate would be 8.00%.

In order to exercise this option, there are usually several conditions that must be met such as: (1) the borrower must still be the owner/occupant of the property, and (2) the borrower must be current in making monthly payments and can not have been more than 30 days late on any of the last 12 monthly payments made prior to the time the option is exercised. In addition, the option may not be available if interest rates have risen by more than 5.00% over the initial rate.

7 Year Balloon

This type of loan is similar to the 5 Year Balloon loan except for the fact that the term of the loan is 7 years as opposed to 5 years and the refinance option at the end of the term is for an additional 23 years as opposed to 25 years. As with the 5 Year Balloon loan, the index is typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index (typically .625% – 1.25%). Also, as with the 5 Year Balloon, loan, the borrower must meet specified conditions to be able to take advantage of the loan extension option and the interest rate must not have risen by more than 5.00% over the initial rate.

Pre-Approval Loan

Some lenders offer loan programs that provide borrowers the opportunity to obtain an approval for their loan before they select a property to purchase. Generally, such pre-approvals are subject only to a satisfactory appraisal of the property ultimately selected by the borrower. A pre-approval should not be confused with a pre-qualification, which is an unverified analysis of a borrower’s ability to qualify for a loan and is subject to verification of a borrower’s income, a borrower’s assets and a satisfactory appraisal of the property selected for purchase.

1st Time Homebuyer Loan

A loan is considered a 1st time homebuyer loan when it has one or more features that are available only to 1st time homebuyers. For example, a lender may reduce its interest rate (typically by one eighth to one quarter of one percent), reduce or eliminate its closing costs and, if an adjustable rate mortgage, reduce its margin (typicaly by one quarter of one percent). Such a loan may also have less stringent loan qualification guidelines.

5/25 Two Step Mortgage

This type of loan has monthly payments that are based on a 30 year repayment schedule and the interest rate remains fixed for the first 60 months (five years). After that time, the interest rate (and, therefore, the monthly payments) may change once for the remaining 25 years of the loan. The new interest rate is based upon fluctuations in an index (typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the “margin” (typically .625% – 1.25%). For example, if the index equals 5.0% at the time of adjustment, and the margin equals 1.0%, the new interest rate would be 6.0%. However, this type of loan program usually has limits on how much the interest rate can increase or decrease at the time of the interest rate adjustment. Typically, the interest rate cannot increase more than 6% from the initial interest rate nor decrease more than 1.5% from the initial rate.
Back to Loan Description Chart

7/23 Two Step Mortgage

This type of loan is similar to the 5/25 Two Step Mortgage except for the fact that the monthly payments remain fixed for the first 84 months (seven years) as opposed to five years and after that time the interest rate may change once for the remaining 23 years of the loan. As with a 5/25 Two Step Mortgage, the index is typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate), the margin is typically .625% -1.25% and the interest rate cannot increase more than 6% from the initial interest rate nor decrease more than 1.5% from the initial rate.

3-2-1 Buydown Loan

This type of loan program is based on an interest rate (actual rate) that does not change over the term of the loan and has fixed monthly payments that are based on a 30 year repayment schedule. However, the monthly payments that are made during the first 36 months (three years) are calculated based on an interest rate that is less than the actual rate. The first 12 monthly payments of the loan are calculated based on an interest rate that is 3% less than the actual rate. For the second year of the loan, payments 13 through 24 are based on an interest rate that is 2% less than the actual rate of the loan. For the third year of the loan, payments 25 through 36 are based on an interest rate that is 1% less than the actual rate. After the third year, the monthly payments to be made over the remaining 27 years of the loan are based on the actual rate.

This type of loan is typically used to help borrowers who are unable to qualify for a loan at current interest rates. By “buying down” the interest rate, the borrower decreases the initial monthly payments that are required to be made which increases the borrower’s ability to qualify for the loan. The cost of “buying down” an interest rate for a period of time is generally determined by calculating the difference between (a) the total monthly payments that would have been made during the buydown period if the loan did not have a buydown feature and (b) the total monthly payments to be made during this same period with the buydown feature in place. This amount is generally paid for at time of closing.

2-1 Buydown Loan

This type of loan is similar to a 3-2-1 Buydown loan, however, the buydown feature of the loan occurs during the first two years of the loan as opposed to the first three years. Accordingly, the first 12 monthly payments of the loan are calculated based on an interest rate that is 2% less than the actual rate and for the second year of the loan, payments 13 through 24 are calculated based on an interest rate that is 1% less than the actual interest rate.

1-0 Buydown Loan

This type of loan is similar to a 3-2-1 Buydown loan and a 2-1 Buydown loan however, the buydown feature of the loan occurs only during the first year of the loan as opposed to the first two or three years. Accordingly, the first 12 monthly payments of the loan are calculated based on an interest rate that is 1% less than the actual rate.

Blended Loans

Since fixed rate conforming loans (see definition above) generally have lower interest rates than fixed rate jumbo loans , some lenders offer borrowers seeking to borrow more than the conforming loan amount, a loan that allows the borrower to take advantage of the lower fixed interest rate of a conforming loan on a portion of their loan that does not exceed the conforming loan limit. This feature is then blended together with a variable interest rate feature on that portion of the loan amount that exceeds the conforming loan limit. For example, if the conforming loan limit is $417,000, a consumer looking for a fixed rate loan of more than $417,000 can obtain a conforming fixed interest rate on the first $417,000 of their loan provided they are willing to have a variable interest rate on that portion of their loan that exceeds $417,000. The variable interest rate portion is often similar to a home equity loan which is typically tied to the interest rate known as the “prime rate”.

B/C Credit Loans

These types of loans are available to borrowers who have or have had credit problems such as being late on or defaulting on the repayment of loans or credit cards. Although such loans are available as fixed rate or adjustable rate mortgage loans, the interest rate and/or costs associated with such loans are generally higher than loans available to borrowers who do not have a history of credit issues to reflect the fact that the risk associated with such loans is generally higher. Borrowers who do not have a history of credit issues are said to have “A” credit. Those with a history of credit issues are said to have “B” credit or “C” credit depending on the severity of the credit issues.

Assumable Loans

This type of loan does not have to be paid off by a borrower when the borrower sells his/her home. Instead, the new buyer of the home may assume the obligation of the initial buyer to repay the loan in accordance with the terms of the loan. Generally, most loans are not assumable and some that are, may be subject to the lender’s approval of the new borrower and/or the lender’s ability to modify the terms of the loan.

Second Home Loans

This type of loan is used to purchase or refinance a property other than a borrower’s principal residence. In most instances, such a property is a borrower’s vacation home (or “second home”). Provided that the property is not strictly an investment property, the interest rate and costs charged on such loans will generally be the same as those available on loans used to purchase or refinance a borrower’s principal residence.

No Income / No Asset Verification Loans

This type of loan is similar to a No Income Verification Loan and a No Asset Verification Loan except it is used by borrowers who do not wish to or are unable to verify their income and their assets. Once again, the interest rate and/or costs for such loans may be slightly higher than normal to reflect the higher degree of risk involved in loaning to borrowers without verifying their income or assets. Such risk is often offset, to some degree, by borrowers who have a significant history of paying loans of a similar type as the one being sought or who are borrowing only a small percentage of a property’s value.

No Income Verification Loans

These types of loans are available to borrowers who, for one reason or another, do not wish to or are unable to verify their annual income. An example of such borrowers includes those who obtain revenue from sources they do not wish to divulge or those that receive all or a portion of their income in cash. While available from some lenders as fixed or adjustable rate loans, the interest rate and/or costs may be slightly higher than normal to reflect the higher degree of risk involved in loaning to borrowers whose incomes have not been verified. Such risk is often offset to some degree by borrowers who have significant verifiable assets or who are borrowing only a small percentage of a property’s value.

No Asset Verification Loans

This type of loan is similar to a No Income Verification Loan except it is used by borrowers who do not wish to or are unable to verify their assets as opposed to verifying their income. As with No Income Verification loans, the interest rate and/or costs may be slightly higher than normal to reflect the higher degree of risk involved in loaning to borrowers without verifying their assets. Here, such risk is often offset to some degree by borrowers who have significant verifiable incomes or who are only borrowing a small percentage of a property’s value.

Government Loans

This type of loan is guaranteed by a federal agency such as the Veterans Administration or the Federal Housing Administration or by a State agency such as a State housing authority. As a result, such loans are typically offered at reduced interest rates and have less stringent loan qualification guidelines. Such loans, however, are generally targeted to a specific group of people and contain income, purchase price or other eligibility requirements.

Construction Loans

This type of loan is typically used to finance the construction of a home. It may or may not also include the purchase of the land upon which the home is to be built. Unlike a typical mortgage loan where the entire amount of the loan is disbursed to the borrower at the time the loan transaction is consummated, a construction loan typically involves a series of disbursements which are linked to a construction schedule. Some construction loans have fixed interest rates, others have variable interest rates. In addition, some construction loans automatically convert to a regular mortgage (referred to as “permanent” financing) once construction has been completed, while others require another loan transaction to take place so the borrower can payoff the construction loan and obtain permanent financing.

Relocation Loans

This type of loan is offered by lenders to borrowers who are relocating their principal residence to the lender’s area. Although such loans have most or all of the features associated with typical mortgage loans used to purchase a borrower’s principal residence, relocation loans often have flexible loan qualification guidelines to accommodate situations that arise during a borrower’s relocation to another area. For example, even though a borrower’s spouse has not obtained a job in the area they are moving to, the lender may take all or a portion of the spouse’s former employment income into consideration based on the anticipation of future employment.

Bridge Loans

This type of loan is offered by lenders to borrowers who plan to use money from the sale of their current property to purchase their new property but are moving into the new property before the sale of their current property takes place. In such instances, a bridge loan is obtained, (based on and secured by the borrower’s equity in their current property), to “bridge” the time between when the borrower buys their new property and the time when the borrower sells their current property At the time of the sale of the current property, the proceeds from such sale are used to pay off the bridge loan. Typically, bridge loans are for a short period of time (e.g. 3 – 6 months) and feature adjustable interest rates tied to an index such as the prime interest rate.

Convertible Loans

This type of loan refers to an adjustable rate mortgage that contains a feature which allows a borrower to convert their loan from an adjustable rate mortgage to a fixed rate mortgage. Such loans generally contain a time period during which the borrower may exercise his/her option to convert (typically between the 13th and 60th month of the loan). The new fixed interest rate that the borrower converts to is based upon fluctuations in an index (typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index (typically .625% – 1.25%). For example, if the index equals 7.0% at the time of conversion and the margin is 1.0%, the new interest rate would be 8.0%. Some lenders charge borrowers a fee to exercise their conversion option, however, such fees generally do not exceed $250.

Floatdown Loans

This type of loan refers to a loan that enables a borrower to “lock in” an interest rate (generally at the time of submitting a loan application) and obtain a better interest rate in the event that rates decrease between the time of submitting the application and the time the loan closing occurs. The initial interest rate basically “floats down” to the new rate. In many instances, the “floatdown” does not occur unless the decrease in the interest rate equals or exceeds .375% (3/8 of one percent).

Land Loans

While the typical mortgage loan involves both a structure and the land upon which the structure is built, this type of loan involves only land on which a structure has yet to be built.

10/3 Adjustable Rate Mortgage (ARM)

This type of loan is similar to the 7/3 ARM except for the fact that the interest rate remains fixed for the first 120 months (ten years) as opposed to the first 84 months. After that time, the interest rate may change every 36 months. As with a 7/3 ARM, the index is typically the Three Year Treasury Security index, the margin is typically 2.50% – 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

10/1 Adjustable Rate Mortgage (ARM)

This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 120 months (ten years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM, 5/1 ARM and 7/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% – 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

Extended Lock Loan

This type of loan refers to a loan that enables a borrower to “lock in” an interest rate (generally at the time of submitting a loan application) for an extended period of time. Since most loan programs enable borrowers to lock for 45-60 days, a loan program that allows for longer periods of time such as 90, 120, or 180 days is considered an extended lock loans.

6 Month Adjustable Rate Mortgage (ARM)

This type of loan has monthly payments that are based on a 30 year repayment schedule but the interest rate (and, therefore, the monthly payments) may change every 6 months (this is referred to as the “adjustment period”). The new rate is based upon fluctuations in an index (typically the One Year Treasury Security) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the “margin” (typically 2.50% – 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%

However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 1% and is referred to as an “adjustment cap”. There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a “lifetime cap”. The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.

1 Year Adjustable Rate Mortgage (ARM)

This type of loan is similar to the 6 month ARM except for the fact that the adjustment period is every 12 months (one year) as opposed to every 6 months. In addition, the adjustment cap on a 1 year ARM is typically 2% as opposed to 1%. The lifetime cap is typically 6%. The index is typically the One Year Treasury Security index and the margin is typically 2.50% – 3.00%.

2 Year Adjustable Rate Mortgage (ARM)

This type of loan is also similar to the 6 month ARM except for the fact that the adjustment period is every 24 months (two years) as opposed to every 6 months. As with a 1 year ARM, the index is typically the One Year Treasury Security index and the margin is typically 2.50% – 3.00%. Also, the adjustment cap is typically 6%.

3 Year Adjustable Rate Mortgage (ARM)

This type of loan (also referred to as a “3/3 ARM”) is similar to the 6 month ARM except for the fact that the adjustment period is every 36 months (three years) as opposed to every 6 months. The index is typically the Three Year Treasury Security index. As with a 1 or 2 year ARM, the margin is typically 2.50% – 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

5 Year Adjustable Rate Mortgage (ARM)

This type of loan (also referred to as a “5/5 ARM”) is similar to the 6 month ARM except for the fact that the adjustment period is every 60 months (five years) as opposed to every 6 months. The index is typically the Five Year Treasury Security index. As with a 1 or 2 year ARM, the margin is typically 2.50% – 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

3/1 Adjustable Rate Mortgage (ARM)

This type of loan has monthly payments that are based on a 30 year repayment schedule and the interest rate remains fixed for the first 36 months (three years). After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). This is referred to as the “adjustment period”. The new rate is based upon fluctuations in an index (typically the One Year Treasury Security) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the “margin” (typically 2.50% – 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 2% and is referred to as an “adjustment cap”. There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a “lifetime cap”. The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.

5/1 Year Adjustable Rate Mortgage (ARM)

This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 60 months (five years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% – 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

7/1 Adjustable Rate Mortgage (ARM)

This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 84 months (seven years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM and a 5/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% – 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

No Green Card Loan

Many loan programs are not available to borrowers who are not citizens of the United States and who do not possess a “green card” from the U.S. Department of Immigration & Naturalization. Such cards enable a borrower to remain in this country indefinitely. Loan programs that are available to borrowers who are neither U.S. citizens nor possess a green card, are referred to as “no green card loans”.

• Convenience. Refinancing to combine a first and second mortgage into one payment saves time and effort that occur when you make payments to multiple lenders. Consolidating a first and second mortgage also opens a junior mortgage lien position on your home if you decide to take out a home equity loan or line of credit in the future.

 

• Lower payments. Perhaps you want to ease the burden of making payments on a 15-year mortgage loan by refinancing with a 30-year mortgage. Stretching out your loan term reduces your monthly payments. If you refinance to lower your payments, however, make sure your new mortgage doesn’t impose a prepayment penalty: With the windfall that comes from lowering your payments, you may occasionally have the resources to pay an extra amount.

• Treasury bonds. The yield on 10-year Treasury bonds is often used as an index for 30-year, fixed-rate mortgage loans. Yields on the 1-year Treasury bill are often used as an index rate for adjustable-rate mortgage loans.
• Government agency bonds. Yields on agency bonds are sometimes used as index rates for mortgage loans. Agency bonds include securities sold by Fannie Mae, Freddie Mac and Ginnie Mae. These are quasi-governmental organizations that buy mortgage loans from lenders, repackage them as securities and sell them to investors. This market for buying and selling these mortgage-backed securities is called the secondary market. By creating a secondary market, lenders can free up some of their capital to make new mortgage loans.
• Cost of Funds Index (11th District). The Eleventh District of the Federal Home Loan Bank Board (FHLB), which covers California, Nevada and Arizona, publishes a Cost of Funds Index. The COFI index is frequently used as an index on adjustable-rate (ARM) loans. Other regional offices of the FHLB have their own indexes, but the Eleventh District’s index is the most widely used.
• LIBOR. Other interest rates are increasingly used as indexes for ARM loans. Occasionally, the London Interbank Offered Rate (LIBOR) is used as an index rate for some mortgage loans.