Mortgage Loan Basics Interest Only Loans Pay Option Arm

Mortgage Loan Basics Interest Only Loans Pay Option Arm



Mortgage Loan Basics: Interest Only Loans,​ Pay Option ARM
To understand loans and mortgages we need to​ understand loan limits first .​
If your loan amount exceeds the​ amount below,​ you​ will qualify for a​ Jumbo Loan,​ which carries higher interest rate.
One-Family (single family homes) $417,​000
Two-Family(duplex) $533,​850
Three-Family (triplex) $645,​300
Four-Family(fourplex) $801,​950
FIXED Loans:
30 Year Fixed Mortgage Rates
This loan program is​ fixed for 30 years .​
Your interest rate will not change for 30 years .​
This is​ ideal for people who plan to​ stay at​ their present property for a​ long period of​ time.
20 Year Fixed Mortgage Rates
Fixed for 20 years .​
Your payment will be higher than 30 year fixed loan becuase your loan term is​ only for 20 years .​
Interest rate will not change for 20 years.
15 Year Fixed Mortgage Rates
15 year fixed loan has a​ loan term of​ 15 years and will not change during this period .​
Your monthly payment on​ this loan program will be much higher than 20 years fixed or​ 30 years fixed .​
Use this loan program if​ you​ plan to​ sell your home in​ 5-8 years .​
Interest rate will not change for 15 years.
ARM (Adjustable Rate Mortgage)
ARM Loans are fixed for a​ certain period of​ time,​ where after that period ARM loan becomes an​ adjustable loan .​
How do they work?
Each ARM Loan Program has these options:
1) Index: Most comon index-LIBOR
2) Margin: is​ given to​ you​ by your lender,​ and it​ is​ the​ difference between the​ index rate and the​ interest charged to​ the​ borrower
For example 5/1 ARM .​
This loan is​ fixed for 5 years after which in​ 6th year it​ becomes an​ adjustable loan .​
Your loan officer will tell you​ what your index is​ and what your margin is​ .​
Usually 5/1 arm is​ tied to​ 1-year treasury index and margin is​ around 2.00%-3.00%
Your index + margin = Fully Index rate .​
Your new note rate (interest rate) after 5th year.
What about the​ 6th year? What would your payment be?
Let's say that your loan officer told you​ that your margin is​ 2.5% with 1 year treasury index .​
You will have to​ look up 1 year treasury index for a​ specific month.
1 year treasury as​ of​ Oct.2018 is​ 4.18,​ and you​ know that your margin is​ 2.5% .​
Therefore you​ new interest rate is​ 1 year treasury 4.18% (index) + 2.5% (margin) = 6.68% for the​ begining of​ 6th year.
Index rate are move on​ monthly basis,​ therefore your payment may flunctuate each month .​
In most cases banks wills end you​ a​ statement advising you​ that your rate will change.
3) to​ protect consumers from high index rates,​ lenders implemented a​ CAPS.
An example of​ this is​ a​ 2/6 cap,​ which allows the​ interest rate on​ your ARM loan to​ go up or​ down by no more than two percent every adjustment period,​ and has a​ total limit of​ six percent for cumulative changes .​
Therefore a​ 2/6 cap on​ a​ 5% ARM will allow a​ maximum rate (6 + 5%) of​ no more than 11%.
In some cases you​ will see 2/2/6,​ which means 2% adjustment with 2 year prepayment penalty and total of​ six percent of​ cumulative changes.
4) With an​ arm you​ can have either a​ fixed rate or​ you​ can choose an​ Interest Only structure loan.
1/1 ARM Mortgage Rates
1 year ARM (Adjustable Rate Mortgage) is​ fixed for 1 year and in​ 2nd year it​ becomes an​ adjustable.
3/1 ARM Mortgage Rates
3 year ARM (Adjustable Rate Mortgage) is​ fixed for 3 years and in​ 4th year it​ becomes an​ adjustable.
5/1 ARM Mortgage Rates
5 year ARM (Adjustable Rate Mortgage) is​ fixed for 5 years and in​ 6th year it​ becomes an​ adjustable.
7/1 ARM Mortgage Rates
7 year ARM (Adjustable Rate Mortgage) is​ fixed for 7 years and in​ 8th year it​ becomes an​ adjustable.
10/1 ARM Mortgage Rates
10 year ARM (Adjustable Rate Mortgage) is​ fixed for 10 years and in​ 11th year it​ becomes an​ adjustable.
Interest Only Loans
For example,​ if​ a​ 30-year fixed-rate loan of​ $100,​000 at​ 8.5% is​ interest only,​ the​ payment is​ .085/12 times $100,​000,​ or​ $708.34 .​
This is​ an​ example of​ interest only payment.
Each loan payment consists of​ Interest and Principal .​
Here you​ will be paying an​ interest each month and your principal will be adding to​ your balance,​ thus increasing it .​
You may also pay both principal and interest.
If a​ lender offers you​ an​ Interest only Loan these loans are tied to​ an​ index just like ARM loans.
MTA Index: the​ MTA index generally fluctuates slightly more than the​ COFI,​ although its movements track each other very closely.
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1 Month MTA ARM Mortgage Rates
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3 Month MTA ARM Mortgage Rates
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6 Month MTA ARM Mortgage Rates
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12 Month MTA ARM Mortgage Rates
COFI Index: This index rise (and fall) more slowly than rates in​ general,​ which is​ good for you​ if​ rates are rising but not good for you​ if​ rates are falling.
.​
1 Month COFI ARM Mortgage Rates
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3 Month COFI ARM Mortgage Rates
LIBOR Index: LIBOR is​ an​ international index,​ which follows the​ world economic condition .​
It allows international investors to​ match their cost of​ lending to​ their cost of​ funds .​
The LIBOR compares most closely to​ the​ CMT index and is​ more open to​ quick and wide fluctuations than the​ COFI.
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6 Month LIBOR ARM Mortgage Rates
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12 Month LIBOR ARM Mortgage Rates
Pay Option ARM Loan
Pay Option ARM in​ a​ new loan program allowing customers to​ choose from up to​ 4 different payments .​
This loan program is​ part of​ an​ ARM,​ but with added flexibility of​ making one of​ the​ 4 payments.
Your intial start rate varies from 1.000% to​ anywhere around 4.000% .​
The intial start rate is​ held only for one month,​ after that interest rate changes monthly.
4 major choises are:
1) Minimum payment: Fot the​ first 12 months interest rate is​ calculated using the​ start rate after that interest rate is​ calculated annually.
Example:
Loan Amount: $200,​000.00
Initial Rate: 1.25%
Index: 3.326 (MTA as​ of​ October 2018)
Margin: 2.75%
Payment Cap: 7.5%
Fully Indexed Rate: 6.076% (ndex + margin )
Minimum Payment Changes:
Year 1 $666.50 Minimum Payment
Year 2 $716.49 = $666.50 + 7.50%
Year 3 $770.22 = $716.49 + 7.50%
Year 4 $827.99 = $770.22 + 7.50%
Year 5 $890.09 = $827.99 + 7.50%
The Option ARM's 7.5% payment cap limits how much the​ payment can increase or​ decrease each year,​ except for every fifth year (beginning in​ the​ 10th year on​ certain programs),​ when the​ cap does not apply .​
In the​ event your balance exceeds your original loan amount by 125% (110% in​ N.Y.),​ the​ payment amount may change more frequently without regard to​ the​ payment cap.
Becasue you​ are paying minimum payment this option will defer a​ payment of​ an​ interest which will be added to​ your balance.
Minimum Payment Adjustment Period: the​ minimum payment is​ usually set to​ 12 months,​ unless negative amortization limit is​ reached.
Minimum Payment Cap: This is​ a​ limit on​ how much the​ minimum payment can change .​
Your payment cap will be 7.5% for the​ first five years .​
On your next payment due,​ your minimum payment cannot increse or​ decrease more than 7.5% .​
If it​ does than a​ loan is​ recast.
Recast (Recasting) or​ re-calculating your loan is​ a​ way of​ limiting negative amortization (neg-am) .​
Option ARM's recast every 5 years .​
When the​ loan is​ recast,​ the​ payment required to​ fully amortize the​ loan over the​ remaining term becomes the​ new minimum payment
2) Interest Only Payment: With Interest Only you​ will avoid deffered interest,​ becausue you​ are paying principal and interest .​
If you​ pay only Interest or​ Principal your loan balance will increase because you​ are adding either pricipal payment or​ interest payment to​ your loan balance,​ thus leading towards Neg-Am Loan.
Your payment may change on​ monthly basis based on​ ARM index (LIBOR,​COFI,​MTA).
3) Fully Amortizing 30-Year Payment: It's calculated each month based on​ the​ prior month's interest rate,​ loan balance and remaining loan term .​
When you​ choose this option,​ you​ reduce your principal and pay off your loan on​ schedule.
4) Fully Amortizing 15-Year Payment: It is​ calculated from the​ first payment due date.
Negative Amortization Loan (Neg-Am Loan)
Negative amortization loans calculate two interest rates .​
The first is​ called the​ payment rate the​ second is​ the​ actual interest rate .​
The true interest rate is​ calculated as​ simply the​ index plus the​ margin without periodic caps .​
Borrowers are given a​ choice of​ which rate to​ pay .​
Thus advertisers of​ negative amortization loans often refer to​ these loans as​ payment option loans.
A loan that allows negative amortization means the​ borrower is​ allowed to​ make a​ monthly mortgage payment that is​ less than the​ interest actually owed during that month .​
For example,​ let's say we have a​ $200,​000 loan with an​ adjustable rate that's currently sitting at​ five percent .​
Simple interest on​ this loan is​ easy to​ calculate .​
Multiply the​ interest rate by the​ loan amount and you​ have the​ annual interest of​ $10,​000 .​
Divide $10,​000 by 12 months and the​ monthly interest only payment is​ $833.33 or​ simply here is​ the​ formula for your monthly payment for interest only loans: loan balance x interest rates / 12 = monthly payment.
Now,​ let's say that there's a​ provision in​ the​ loan documents that allow the​ borrower to​ make a​ minimum payment based on​ a​ payment rate of​ four percent .​
So your lowest payment would be $666.67 because the​ payment rate is​ based upon four percent,​ not the​ actual interest rate,​ which is​ five percent.
So if​ you​ make make the​ lowest allowable payment you​ are actually losing $166.67 in​ equity .​
The balance of​ the​ loan increases to​ $200,​166.67.
Exotic Mortgage
You may have heard this term before .​
So what are they?
The latest and most exotic mortgages out there include:
1 .​
The 40-Year Mortgage: This is​ similar to​ a​ 30-year fixed rate mortgage,​ except the​ payment is​ being stretched over an​ extra 10 years .​
The lender will charge a​ slightly higher interest rate,​ as​ much as​ half a​ percentage point.
2 .​
The Interest-Only Mortgage: With an​ interest-only mortgage,​ the​ lender allows the​ borrower to​ pay only the​ interest for the​ first so many years of​ a​ mortgage .​
After the​ grace period,​ the​ loan essentially becomes a​ new mortgage with the​ interest and principal being stretched only the​ remaining years .​
Please refer above for Interest Only Loans.
3 .​
The Negative Amortization Mortgage: This interest-only type of​ mortgage allows a​ buyer to​ pay less than the​ full amount of​ interest .​
The difference between the​ full interest payment and the​ amount actually paid is​ added to​ the​ balance of​ the​ loan .​
Please refer above for more information.
4 .​
The Piggy Back Mortgage: This is​ actually two mortgages,​ one on​ top of​ the​ other .​
The first mortgage covers 80% of​ the​ property's value .​
The second covers the​ remaining balance at​ a​ slightly higher interest rate.
5 .​
103s and 107s: you​ may not need to​ save for a​ down payment at​ all .​
You could borrow 3% or​ 7% more than your home is​ even worth .​
These loans give you​ the​ option of​ borrowing money needed for closing costs and moving costs .​
You can include it​ all in​ the​ mortgage.
6 .​
Home Equity Line of​ Credit: These aren't just for those who own a​ home! They are commonly known as​ HELOCs,​ and they can finance an​ original home purchase using a​ credit line instead of​ a​ traditional mortgage .​
HELOCs are variable-rate mortgages tied to​ the​ prime rate .​
If you​ use this mortgage as​ your first mortgage,​ all of​ the​ interest is​ tax deductible.




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