Mortgage Programs

With an adjustable rate mortgage (ARM) the interest rate is subject to change, in response to changes in the Treasury bill rate or the prime rate. The purpose of the interest rate adjustment is primarily to bring the interest rate on the mortgage in line with market rates. The mortgage holder is protected by a maximum interest rate (called a ceiling), which can be reset annually. Traditionally ARMs specify limits as to how high or low the interest rate can go, and how frequently the changes can be made. Usually ARMs start out with better interest rates than fixed rate mortgages, in order to compensate the borrower for the additional risk that future interest rate fluctuations will create.
ARMs come in many shapes and sizes; 3/1, 5/1, 7/1, 10/1…etc. These are fixed period ARMs and they feature a fixed rate period before adjusting.

The first digit (5/1) represents how long the initial rate period is fixed for. With the 5/1 ARM, that would be 5 years or 60 monthly payments. The second digit (5/1) is how often the ARM will adjust after the fixed period (with a 5/1 ARM the adjustments would begin at the 61st payment). Your rate will then continue to adjust once annually on the anniversary of the first adjustment date. A 5/6 ARM adjusts every 6 months instead of once a year.

CAPS are also part of an ARM, the CAPS are in place to restrict how high or low your ARM can adjust. They too can vary. Common CAPS are 5/2/5 or 2/2/6 for the 5/1 ARMs.

The first digit of the CAP (2/2/6) represents how much the interest rate can adjust at the first adjustment point. So a 5/1 ARM, with a 2/2/6 CAP may adjust up or down no more than 2% at the first adjustment date.

The second digit (2/2/6) signifies how much the rate may be adjusted up or down after the first adjustment and every adjustment point thereafter (once a year for a 5/1 ARM; every 6 months for a 5/6 ARM).

The last digit (2/2/6) is also known as the ceiling and represents the highest that the rate can ever be adjusted to.

It is very important to find out from your Loan Officer what the CAPS are and what the margin is.

Someone that is considering not retaining the mortgage or property for a long term can benefit financially by choosing an adjustable rate mortgage.

The Federal Housing Administration is a division of the U.S. Department of Housing and Urban Development (HUD). FHA loans are designed to provide affordable mortgages to the average homebuyer. The federal government insures FHA loans participating lending institutions against loss from default on qualifying loans.

Features:

Veterans Administration loans were created to help veterans finance the purchase of their homes with favorable loan terms. For the purpose of the VA program, “veteran” includes active duty service personnel and certain categories of spouses. Like FHA loans, the federal government insures VA loans approved lending institutions against loss from default on qualifying loans.

Features:

Refinancing refers to obtaining a secured loan to pay off an existing loan secured by the same assets. Since both loans are secured with the same assets, repayment is immediate and the loan amount cannot be used for other purposes, unless there is cash remaining after the previous loan is cancelled. The new loan can be obtained at either the same lending institution or at another. There are a number of reasons why refinancing may be undertaken; to reduce interest costs by financing at a lower interest rate, to extend the length of the loan term, to reduce risk, to reduce monthly payments, to convert an adjustable rate into a fixed rate or to make home improvements.

Types:

Cash-out refinance: This option offers refinancing with a larger loan amount than your current loan and keeping the cash difference. The cash can then be used for home improvements or even credit card or other debt consolidation. HELOC: Home Equity Line of Credit. This is a revolving line of credit where you only pay for what you use. It is typically used for home improvements and to pay down debt. Rate Term: This option is used to lower the interest rate and payments on your existing mortgage.

A reverse mortgage is a special loan for homeowners who are at least 62 years of age or older. It is an arrangement whereby a homeowner borrows against their home equity and they receive regular payments from the lender until the total payments reach a predetermined limit. The loan will continue (without payment from the homeowner) as long as they remain in the home as their primary residence, make necessary home repairs and pay the property taxes. Basically it is a loan in reverse, where the lender pays the homeowner, enabling them to turn the value of their property into cash. The loan will be paid back to the lender upon sale of the property or death of the home owner.

A construction loan is a short term loan that is used to pay for the building of a house. Construction loans are paid off by a long term mortgage loan on the completed home. The money from the construction loan is disbursed throughout the course of the building project. Usually the lender is involved throughout the course of construction, reviewing completed work at various stages. Construction loans are closely tied to the final mortgage on the home. Borrowers have to apply for the final mortgage and they have to be approved before applying for the construction loan. The long term mortgage and the construction loan on the finished home are usually tied together in what is called a construction/perm loan. This is beneficial financially because the closing costs are reduced. The application and approval process are also much easier.

A home improvement loan is a low interest loan lent to a homeowner for home repairs, remodeling or updates. They are intended to increase the value of your home. These loans are usually short term and can either be secured or unsecured.

An interest only mortgage involves the borrower taking out a 30 year mortgage and opting to pay interest for a predetermined amount of time, such as 3, 5, 7 or 10 years. At the end of the interest only period the monthly payments readjust to include the principal and the loan is re-amortized for the remaining years which can cause the monthly payment to increase dramatically. At this point, usually the borrower will either refinance, start paying off the principal, or sell the property. According to research studies homes are sold on average every 5 to 7 years. An interest only mortgage is a good fit if you plan to sell within that period, why pay principal when the first 10 years of a mortgage payment are mostly towards interest.