|
 |
|
|
|
|
|
|
|
 |
- For more information about affordable loan programs and new home loans including Home Equity and Refinance call
|
| |
 |
| Preparing for Home Ownership |
 | |
Types of Loans
Conforming and Non-ConformingThere are home loans for every type of borrower. Home loans come in two major categories: conventional and government. Government loans are those insured or guaranteed by the government. Everything else is conventional. There are two types of conventional loans: conforming and non-conforming.
- A “conforming” loan means that it conforms to the basic guidelines established by Fannie Mae and Freddie Mac, the leading purchasers of home loan packages on the secondary market. A loan that exceeds the Fannie Mae/Freddie Mac maximum loan limit is called a “jumbo” loan and usually has a higher rate of interest.
- A “non-conforming” loan is simply one that does not meet these guidelines.
Fixed RateLoans may have either a fixed rate or an adjustable rate. With a fixed rate loan, the interest rate is agreed upon at the origination of the loan and does not change over the life of the loan. The most popular fixed rate loans are for either 15 or 30 years. A fixed rate loan is fully amortized and calls for equal payments over the term of the loan, with the balance completely paid off at the end of the term. The principal and interest (PI) portions of the loan will not change.
Adjustable RateWith an adjustable rate mortgage (ARM), the payment can change in each adjustment period because the interest rate (note rate) fluctuates. The interest rate is based on a formula using a current economic index and the lender’s margin. The adjustment period can be monthly, semi-annually, annually or multi-year. Caps are provided to limit how much the interest rate can go either up or down in any new adjustment period or over the life of the loan. An initial interest rate is typically set lower for the first adjustment period as a balancing factor in taking the risk that the rate and payment may increase later in the loan term. Fixed period ARMs, also called Hybrid ARMs (1/1, 3/1, 5/1, 7/1, 10/1), provide the stability of a fixed payment for the initial adjustment period (one, three, five, seven or 10 years) and then convert into an ARM that adjusts once a year.
How an Adjustable Rate Could ChangeThe following chart depicts how a rate could change during the ARM period:
| Example of ARM Rate Changes |
| (rates are for informational purposes only) |
| 1-Year ARM |
Description |
At loan
origination |
1st adj.
period |
2nd adj.
period |
3rd adj.
period |
| Index |
Treasury securities (MTA),
COFI, LIBOR |
1-yr Treasury
security: 4% |
4.5% |
5.5% |
5% |
| Margin |
Margin set by lender
(does not change) |
2.5% |
2.5% |
2.5% |
2.5% |
| Caps |
Limits per adjustment
period and life of loan |
2% per adj. period
6% per life of loan |
6%
(4+2) |
8%
(6+2) |
7.5%
(under cap) |
| Note Rate |
Index plus margin |
6.5 %
(4% + 2.5%)
APR = 6.818% |
7%
APR = 7.328% |
8%
APR = 8.349% |
7.5%
APR = 7.838% | |
| Note: this example assumes a $150,000 loan amount, 3% down payment, $500 in lender fees, and two discount points. A 4% initial rate was offered at loan origination with a 4.274% APR. |
Ask About a Worst-Case ScenarioAs you can see, the rate during the ARM period can vary greatly. If you are considering an ARM, ask your home loan consultant to show you what a “worst-case scenario” would be using current indexes, the lender’s margin and caps. Be sure you fully understand what the rate changes would mean to your monthly payment amount before selecting this type of loan.
|
|