Random Mortgage Knowledge

Random Mortgage Knowledge - There are millions of things to know about the mortgage industry and obtaining a mortgage. Please peruse the following random bits of knowledge. Feel Free to Press Control-F to search for keywords.

ARM is an acronym for Adjustable Rate Mortgages. These mortgages are typically fixed for a predefined number of years and then may adjust.

There are more to mortgages than simply interest rates. Sometimes a great rate may not be the best way to structure your mortgage. Always consult with your mortgage broker to find the best combination of rate, term and fees before moving forward with your purchase or refinance.

Although getting a mortgage is important, understanding your debt and how to better structure it is also very important. Being able to finance your debt in ways that improve your tax situation and your monthly cashflow bring you to the level of what the rich do on a daily basis.

Your credit score is the biggest factor used in determining the loan programs you qualify for. Getting a mortgage and making timely payments is perhaps the best way to repair a bad credit profile. Even though your initial mortgage terms may not be that attractive, you should be able to refinance into a much better loan program after a year or so of making timely payments.

It is a common misconception that a home is an investment. It is more accurate to consider it a liability. It is a debt that you owe money on. It is only an asset if you generate a positive cash flow from rent, or if you liquidate the equity by selling or refinancing. Even if it were an investment consumers should remember that there are risks with any investment.

Purchasing a home is an investment in your families future. You need a stable environment to thrive in and a home is a long term financial investment that you will reap results from after paying down the mortgage.

If you are thinking about getting a 15 year mortgage then consider the following.

Fully amortizing mortgages have a higher percentage of the monthly payment going towards interest at the beginning of the loan than towards the end. This means that the tax savings of a loan is larger at the beginning of the loan then the end.

A 15 year mortgage has higher payments to get a loan paid off in the 15 years. A 30 year mortgage has lower payments since the loan is paid off over a longer period of time.

If one chooses a 30 year mortgage which makes lower payments and puts the difference between the 30 year and 15 year payments into an investment account that gets 8% a year, one can gather enough in the investment account to payoff their 30 year mortgage in 15 years and have an additional $25,000.

If you'd like to learn more, contact Tony Webb.

Paying one extra payment per year on a 30 Year Mortgage can reduce your term to just under 23 years!

Changes in the quoted interest rates of Fixed Rate Mortgages are less dependent on the Federal Reserve's overnight borrowing rate, or "Fed Funds Rate", than commonly believed. In fact,the Fed rate increases and decreases which Mr. Bernanke and Mr Greenspan before him announce are more directly linked to rises and falls in short term interest rates, such as those which determine the rates on Adjustable Rate Mortgages.

Negative amortization loans or pay option loans as they are sometimes called are a great financial tool if used correctly by financially responsible borrowers.

There are even 40 and 50 year mortgages.
This allows the mortgage to be amortized over a longer period, thus resulting in a lower monthly payment.

Conforming loan - Conforming loans meet two criteria:

1. They cannot exceed the current years maximum loan amount limits. The 2005 conforming loan limit is $359,650

2. They also must conform to the credit history, income, loan-to-value, and debt guidelines established by Fannie Mae and/or Freddie Mac.

Non-conforming super jumbo mortgages are available to $10 Million, $20 Million or more, however traditional conforming banks are unable to reliably or competitively finance luxury homes above $1 Million dollars. This leave much of the non-conforming super jumbo market to mortgage specialists who are focused on high dollar purchases and refinance loans.

The new 2006 conforming loan limit is being raised to $417,000. The Office of Federal Housing Enterprise Oversight (OFHEO) determines this amount based on federal data on mean (average) home prices. The conforming loan limits adjustments are supported by the October-to-October changes in the mean (average) home price, as published by the Federal Housing Finance Board (FHFB).

Loans that do not meet the guidelines set for by Fannie Mae and/or Freddie Mac are referred to as either nonconforming or subprime loans.

One feature of a conforming loan that is very beneficial to borrowers is that there are normally no pre payment penalties. Borrowers sometimes find rates and fees that are comparable to conforming loans on Alt A or subprime programs only to discover that the loan has penalty for early prepayment.

When a loan falls out of the conforming loan limit ($417,000 for 2006 for single family residential homes) it is often referred to as a "jumbo" or "luxury" home loan, and if larger than $1 million it is referred to as a "super-jumbo" loan amount. It usually takes "niche" lenders to finance these types of loans who specialize in jumbo and luxury home financing. Additionally, if the borrower seeks financing for more than 80% Loan-to-Value (LTV) on these types of jumbo and super-jumbo loans, they will have to seek out even more specialized lending institutions. In these types of cases working with a mortgage broker that specializes in these types of loans is best since no local institutions are going to provide financing to their applicants. These types of loans are considered higher risk, investing a larger sum of money in one investment, weakening their diversification portfolio.

Conforming mortgage also limit the property types used as collaterals to single family, duplex, 3-family, 4-family, condominiums, cooperatives, and planned unit developments. Properties that do not fall under one of these categories, such as mixed-use properties, commercial properties, apartment buildings of 5 units or more, require non-conforming loans.

Conforming loans now have guidelines to allow you to do a no doc loan, stated income or a stated asset loan.

Because the conforming loan amount has not kept pace with inflation in many hot real estate markets across the country, average home purchases in these areas are increasingly financed with jumbo loans.

Conforming loans with the highest Loan to value's are those that require full documentation of income and assets.

ARM Adjustment Caps - ARM loans, or Adjustable Rate Mortgage products, all have a feature known generally as "caps" which can greatly influence the amount your payment can go up immediately after the fixed introductory period on your ARM (the "teaser" or "start rate") expires or comes to an end.

The most common caps are divided into Interest Rate Caps and Payment Caps.

Here is an example of what common rate caps might be on conforming loans, loans for people with good credit. On an ARM loan you may have rate caps that are 2% and 1%, or written as 2/1 Caps. What exactly does this mean, why are there two caps listed, and how do rate caps work are very common questions. There are 2 numbers listed because generally the first cap number that is listed has to do with the first rate adjustment period of your loan. Therefore, the 2% listed above would mean that your interest rate can not adjust up or down by more than 2%. So if you had a ARM loan at 6.5% and a 2% cap on the first adjustment, the most the rate could go up on that first adjustment would be 8.5%. Now the 1% number that is listed second is intended to be the rate cap for the remainder of the adjustments on loan, after the first adjustment. This means that for every adjustment thereafter the first one, your interest rate would not be able to increase or decrease by more than 1%. This is one example of how ARM adjustment caps can work on ARM loans.

While all ARMs have "caps" for the amount the interest rate can adjust upwards, some also have a "floor" rate, which is the lower end limit of what the interest rate can adjust to. Few people are aware that some Adjustable Rate Mortgages can also adjust to a lower interest rate.

Most SubPrime ARMs the floor rate is the same as your original rate. For conforming ARMs, the floor rate is usually the same as the margin of your interest rate

Even though the interest rates may drop, your monthly payment may not always drop accordingly. If your ARM has an interest rate cap, your rate (and payment) may be held below what it would have adjusted to, had the full change in the index rate been applied. In this case, the increase in interest that was not applied due to your cap may carry over to future adjustments to your interest rate. This is referred to as a carryover. This means that the next time your adjustment period hits, your monthly payment will increase, even if the index has not changed.

ARMs have a life time "cap" assocciated with the rate as well. This represents the highest interest rate you could ever have on the loan. This is typically 6% above your original fixed start rate.

ARM caps can vary from lender to lender.

If you are unsure of your ARM adjustment caps you can always refer back to your ARM rider in your closing documents. The ARM rider will give you all the information about your ARM when it enters its adjustment period. If you are still unsure you can always call your mortgage broker to help you understand the ARM rider document.

Luxury Home Loans - If the mortgage loan you are seeking exceeds $1,000,000, it will be best to seek assistance from a mortgage professional that specializes in large loan limits and guidelines. As a Luxury Loan Specialist, I am familiar with specific guidelines and pricing associated with super-jumbo loans.

A Super Jumbo Mortgage is generally defined as having a principal balance of $650,000 or more. Super Jumbo mortgage loans are primarily used in the purchase and refinance of luxury homes and other high value residential real estate.

Super Jumbo Loans are available up to 100% of the property's value depending upon your credit score and documentation requirements (Full Doc, Stated, No Income No Assets).

Despite popular opinion, there are super-jumbo loans for self-employed borrowers who cannot prove their income. 100% loans are still available, usually only requiring a few months' payments among the borrower's assets.

Super Jumbo loans are usually for individuals with a high net worth and excellent credit history.

MTA Index Refinance - MTA stands for Monthly Treasury Average, and is also know as the MAT or 12 MAT. The MTA or MAT index is a relatively slow moving ARM index based on the 12 month average of the monthly average yields of United States Treasuries, which are securities sold by the US government to finance national spending and are backed by the full faith of the US government.

As an ARM Index, the MTA or 12 MAT index has become increasingly popular in recent years, thanks in large part to the popularity of the Option ARM mortgage for which it serves as one of the most common indexes.

Adjustable Rate Mortgages based on the MTA index are commonly called 1-Month MTA, 3-Month MTA, 12-month MTA, Pay Option ARM, and Pick a Pay Mortgage. While the MTA index itself is more stable than other common ARM indexes such as the CMT index on which it is based, many of the ARM mortgages based on the MTA have rates which adjust each month, even if you dont know it. This presents significant risks to the homeowner who does not understand these mortgages, which can be mitigated by fixing the rate on an MTA ARM by refinancing. Conventional fixed rate mortgages do not have minimum payment options, so many borrowers in MTA-based mortgages do not refinance to convert to a fixed rate because they do not want to make a large monthly payment. However, there are now options for borrowers in MTA index ARM loans to refinance into a fixed rate without sacrificing the minimum payment options. If you are currently in an MTA index-based ARM, and like the low payment caps, you may be eligible to refinance into a fixed rate mortgage (fixed for 3 to 30 years) while still preserving the flexibility of the "minimum payment" deferred interest option for which these loans are best known. These programs are not widely available, and are only offered to qualified borrowers. For more information on Refinancing your MTA Index Adjustable Rate Mortgage to a Fixed Rate Mortgage with similar payment options, call us at 954-479-1222 or request information by email (include your state, the value of your home, and the balance of your mortgages in your message) at acwebb1@bellsouth.net

MTA adjustable home mortgage loans use the 12-Month Treasury Average Index. The 12-MTA is based on average annual yields on U.S. Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve. Historically, MTA adjustable home mortgage loans have not exhibited sharp interest rate increases such as those that occurred in the late 1980s. Additionally, unlike more volatile indices, the 12-MTA has never increased more than .25% in any month for over a decade.

The majority of MTA indexed mortgages are Option ARMs. Most of these option ARM mortgages use the 1 month MTA index, and their rates adjust monthly, although you wouldn't know it because option arm loans have payment caps which keep the minimum payment fixed even though the underlying rate may change. This monthly adjustment with an annual payment cap is really the riskiest part of being in an option ARM, because you may be deferring substantially more interest than you realize. For borrowers in option ARM mortgages, look into a fixed rate pay option product, or fixed option arm, which provides you with more predictable results over a longer period of time.

Remember that the MTA takes the averages of the last 12 months. So even after the Fed has stopped raising rates the MTA will continue to rise. Conversely, if the Fed is in a lowering mood then the MTA will go down at a slower rate as well. Like all ARM's there are advantages and disadvantages to each index.

MTA Index Adjustable Rate Mortgages, including those with multiple payment, cash flow and positive or negative amortization options, are very common in the super jumbo mortgage category (Note: Super Jumbo mortgage is a name given to mortgages from $650,000 up to several million dollars or more).

Indexes which closely track the MTA index, and vice versa, include the COFI or Cost of Funds Index and the COSI or Cost of Savings Index.

All the above make the MTA index a very stable index for those seeking Option ARMs and are well disciplined with their finances.

Initial interest rate - "What is initial interest rate? How long will mine stay unchanged?"

Adjustable Rate Mortgages, or ARMs, which are coming to the end of their fixed initial interest rate period could be a serious liability for you down the road, especially with short term interest rates rising as quickly as they have been. Borrowers in ARM mortgages would be well advised to explore the option of refinancing their adjustable rate mortgage to convert to a fixed rate, while long term interest rates which set the payments of fixed rate mortgages are still low and qualifying for fixed rate refinancing is still easy. Contact a specialist to review your options at 954-479-1222

Your intial interest rate is locked in for a set period of time. After that, it will adjust to the current rate which is arrived at by adding a Margin and Index.

A mortgage has a defined rate and fixed term length. This is different than the amortization, which is usually 30 years. For example, under a 2 year fixed rate term, the rate is fixed for two years.

Be sure to consult with your mortgage professional. Get a clear explanation as to what the fixed period is. Many borrowers will just hear the term 30 year loan, and assume that it will be fixed for the full 30 years.

Different lenders have different Adjustable Rate Mortgages. Each has specified limits on how much the interest rate can change at the initial change date, how much it can change at any subsequent adjustment date, and how much it can adjust overall. Make your mortgage professional explain your loan program completely.

Most adjustable rate mortgages will have rate caps on them. These rate caps are normally for the initial interest rate's first adjustment and each interest rate adjustment thereafter. A common rate cap on various different ARM loans is a 2/1/6 cap. This means that the interest rate can adjust up to 2% on the initial rate adjustment and 1% each adjustment thereafter up to a lifetime cap of 6%. Therefore if you started with a 6% rate, the first adjustment your rate could go up to 8%, your second adjustment could go up to 9% and throughout the course of your loan your rate could increase up to 12%. Because of these adjustments many consumers decide to refinance for something a little more stable and constant. There are other possible rate caps that you could end up with, if you are on an ARM loan, so make sure you understand what the terms of your loan are upfront before you close on your loan.

If you are unclear about your initial interest rate you can refer back to your closing documents. In those documents you will find your note and adjustable rate rider. This will contain all the necessary information on your mortgage. From this information you will be bale to see exactly when and how much your initial interest rate will increase and what the maximum interest rate ceiling is set at.

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