1MTA/ Option ARM:  The program became very popular back in 2001, and it probably reached its peak in 2005. The most important feature of this program is that the payment remains fixed for one full year at a time, while the loan adjusts on a monthly basis for the next 29 years, regardless if the loan is based on the LIBOR bond rate or the MTA bond rate. This may sound scary, but customers like it because of the combination of a low, low start rate with a guarantee that the payment will not increase more than 7.5% over the next 3 years… or until negative amortization has eroded your reserve account… Sound confusing? The savings in a 36 month period usually out weighs the risk, SO with that in mind you should be looking at either a longer adjustable rate mortgage, or a fixed rate loan.  The 1month program has a “margin” (as-in profit margin) of about 2.625 to 3.00% above the price of the LIBOR/MTA (US Monthly Treasury Average). The rate is then rounded up to the nearest eighth of a percent.  The fully indexed rate is lower than most fixed rates...   

Why would someone choose this program? It’s generally a good option for someone with strong assets that may retire the loan, sell the property, or refinance when there is a better window of opportunity. The sale of stock, waiting for unusual bonus earnings, or winning the lottery are all great ways to pay off the loan if rates start to rise.  Remember at anytime rates can rise…you may want to weigh all your options before choosing this product. 

3/1, 5/1, 7/1 10/1 ARM or with an Interest Only Option. This program stays fixed for the pre-set period, becoming a one-year adjustable at the end of the set-time period year. So whether you choose 3, 5, 7, or 1 the adjustments continue annually. Remember, it’s still a 30 year mortgage. It’s really a wonderful program for anyone who needs time to get acclimated to a higher mortgage payment, or for anyone that likes the freedom of prepayment when the cash flow presents itself…. Why would anyone choose this program? Sometimes the bond market can turn quickly, and fixed rates rise temporarily beyond what you comfortably feel you can afford. An adjustable program gives you plenty of time to wait for the right time to refinance into a normal fixed rate. Finding the right fixed rate, especially when seeking a Jumbo Mortgage (any loan amount over $360k), can be problematic…but a lot can change over time… just choose the time you need. The longer the time, however, the higher the rate will be. 

 HELOC/Home Equity Line of Credit/Piggy Back Financing: This loan is based on a secured line. You make payments on the portion of the loan that you’ve drawn. The draw period is usually 10 years. The loan is then locked in (or paid off and closed) and the lender gives 20 years to amortize the remaining account balance. This program has become popular when bridging loans over 80% loan to value. Closing costs are reduced, because PMI (Private Mortgage Insurance) is not needed. It’s called a Piggy Back because a first mortgage is put on the property the same day/moment as a second mortgage. 

 In some cases lenders allow up to 100% combined loan to value. Some lenders will allow 85% total financing on super jumbo products ….allowing a client to borrow more than $5 million, or more, with a significant reduction in closing costs.  

… the downside? The life time caps can be very high, and the loans are based on prime. Prime moves up in a good economy, but down in a poor one.…  The “piggy-back” also allows a borrower to pay back the loan and re-borrow when they need the money for future needs. Generally, people who choose this program are thinking of paying down the mortgage dramatically, over a 5 to 7 year period, with no prepayment penalty… Much like a credit card account, when your statement comes in after you’ve paid down the account, the payment also shrinks…. get the drift?  

 

15 year fixed: The 15 year fixed rate should be the most popular program out today, but it’s not. It’s typically .25% lower in rate than the 30-year fixed, and you pay only half of the interest over the life (180 months) of the loan. Compare the interest savings to 3x’s the loan amount, when you choose a 30-year fixed… Also, take this interesting fact into account: In 5 years time you will have paid down at least 25% of the loan amount, compared to only 5% of the principle balance on a 30-year fixed. Choosing a 15 year fixed rate is really a no-brainer. Then why do people choose the 30-year Fixed rate, or other programs? In most cases the lender chooses for you… yes, strange as it sounds, most people don’t qualify for the 15 year program according to FNMA ratios. Qualifying for a 30-year program is pretty easy to figure out… take the loan amount and divide the figure by 3 to 3.2 depending on the interest rate. The number you come up with should be your combined “adjusted annual income.” So what’s so hard about qualifying for the 15-year program? It’s generally the “back-end ratio,” i.e.: add the higher payment (due to a shorter term) onto the current revolving debt… like car loans, credit cards, student loans, etc…. Suddenly it’s very difficult to qualify.

What is the typical profile of an individual who takes on a 15 year fixed program? People obsessed with having little or no debt. They pay bills off as soon as they get them. They’re generally asking for a small mortgage amount based on the loan to value of the property. They qualify because they have no “back end” debt, or because the mortgage amount is within the safe zone of income to debt ratios

 

30 year fixed: Certainly the most popular program over all, 30 year fixed programs are especially attractive when rates are under 8.5%. When fixed rates fall under 7%, a purchase frenzy begins, and an influx in refinances creates huge log jams in underwriting departments: appraisals become slower, and even title companies can’t keep up with the demand… It’s best to be ready to pounce. How do you qualify for a loan amount? The general rule of thumb is …take the loan amount and divide by 3.2 to 3.5% … i.e.: 100/3 =’s 33,000 per year in combined income…. Remember that excessive debt can work against you! What can you do to be prepared? Look at our (checklist)  

 

20 and 40 year fixed: These are specialty terms. Most FNMA lenders offer this option, however don’t expect a discount in rate… Sometimes jumbo lenders offer these options as well, but charge a premium, or require proof of special circumstances before granting acceptance. 

 

Interest only: Interest only programs allow you the flexibility of choosing a minimum payment and then allows you to decide if you'd like to send in more towards the principle loan amount. However, they're generally the introductory apportions of a loan. For instance, a construction loan might have a 9, 12, or 15-month interest only period until the full balance of the loan is drawn, and the loan converts to a 30-year fully amortized mortgage. “Interest only” can also be a feature of a home equity loan. The minimum payment option on a home equity home is the interest only payment. In most cases, a land loan offers an “Interest Only” payment with a balloon balance due at the end of the term. This is also common to the way private notes are held. The seller may offer Interest Only notes/mortgages because it’s the easiest way to do the accounting or repayment. How do you calculate the payment on an interest only program? Take the rate being offered… say it’s 8%… and multiply .08.00 X’s the loan amount (example: $100,000)… take the total yearly interest amount ($8000) and divide by 12 months, this should give you a ball park figure ($666.00) of the interest only portion due at the end of each month… this practice works just like your credit card statement.

 

Prime, Sub-PrimeTeasers, and Prime for life: Loans that are linked or tied to prime are typically 2nd mortgages or 1st mortgages that are given alternative credit status (AKA: Hard Money). The word Prime is associated with the US Prime Lending Rate. A lender will use "prime" as their lending bench mark. The prime rate maybe "indexed". This is when the word  sub-prime is used as a lending rate; the word teaser rate is often heard as well when the rate is offered "below prime". A premium index is added to the loan after the lock in period is over. Ie. The typical teaser loan would state: Prime minus -1% for the first year, and prime +1% after the year is up.

If you're still confused? ...call us at 800.617.3185 and ask for any of our loan officers for help.