Home loan basics

To understand loans and mortgages, we must first understand loan limits. If your loan amount exceeds the amount below, you will qualify for a Jumbo Loan, which carries a higher interest rate.

One Family (Single Family Homes) $ 417,000

Two families (duplex) $ 533,850

Three families (triplex) $ 645,300

Four families (fourplex) $ 801,950

FIXED Loans:

30-year fixed mortgage rates

This loan program has a fixed duration of 30 years. Your interest rate will not change for 30 years. This is ideal for people who plan to stay in their current property for a long period of time.

20-year fixed mortgage rates

Fixed for 20 years. Your payment will be higher than a 30-year fixed loan because the term of your loan is only 20 years. The interest rate will not change for 20 years.

Fixed 15-year mortgage rates

The 15-year fixed loan has a loan term of 15 years and will not change during this period. Your monthly payment in this loan program will be much higher than 20 fixed years or 30 fixed years. Use this loan program if you plan to sell your home in 5-8 years. The interest rate will not change for 15 years.

ARM (adjustable rate mortgage)

ARM loans are fixed for a specified period of time, after that period, the ARM loan becomes an adjustable loan. How do they work?

Each ARM loan program has these options:

1) Index: most common LIBOR index

2) Margin – Provided by your lender and is the difference between the index rate and the interest charged to the borrower.

For example 5/1 ARM. This loan has a fixed duration of 5 years after which in the sixth year it becomes an adjustable loan. Your loan officer will tell you what your index is and what your margin is. Typically, the 5/1 arm is tied to the 1-year treasury ratio and the margin is around 2.00% -3.00%

Your index + margin = Total index rate. Your new promissory note rate (interest rate) after the fifth year.

And the sixth year? What would your payment be?

Let’s say your loan officer told you that your margin is 2.5% with a 1-year cash ratio. You will need to look up the 1-year treasury index for a specific month.

The 1-year cash as of October 2005 is 4.18, and you know that your margin is 2.5%. Therefore, your new interest rate is 1 year of treasury 4.18% (index) + 2.5% (margin) = 6.68% for the beginning of the sixth year.

Index rates move monthly, therefore your payment may fluctuate each month. In most cases, banks will send you a statement warning 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 limit, which allows the interest rate on your ARM loan to rise or fall by no more than two percent in each adjustment period, and has a total limit of six percent for changes. cumulative. 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 a 2% adjustment with a 2-year prepayment penalty and a total of six percent of accumulated changes.

4) With one arm you can have a fixed rate or you can choose an interest-only structured loan.

1/1 ARM mortgage rates

1-year ARM (adjustable rate mortgage) is fixed for 1 year and in the second year it becomes adjustable.

ARM mortgage rates 3/1

3-year ARM (Adjustable Rate Mortgage) is fixed for 3 years and in the 4th year it becomes adjustable.

ARM 5/1 mortgage rates

5-year ARM (adjustable rate mortgage) is fixed for 5 years and in the sixth year it becomes adjustable.

ARM 7/1 mortgage rates

7-year ARM (adjustable rate mortgage) is fixed for 7 years and in the eighth year it becomes adjustable.

ARM 10/1 mortgage rates

10-year ARM (Adjustable Rate Mortgage) is fixed for 10 years and in the eleventh year it becomes 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 per $ 100,000, or $ 708.34. This is an interest-only payment example.

Each loan payment consists of interest and principal. Here you will be paying interest every month and your capital will be added to your balance, thus increasing it. You can also pay both principal and interest.

If a lender offers you a single interest loan, these loans are indexed, just like ARM loans.

MTA Index: The MTA index generally fluctuates a bit more than the COFI, although its movements are tracked very closely.

. MTA 1-Month ARM Mortgage Rates

. 3-month MTA ARM mortgage rates

. 6-month MTA ARM mortgage rates

. MTA 12-Month ARM Mortgage Rates

COFI Index – This index rises (and falls) more slowly than rates in general, which is good for you if rates are going up, but not good for you if rates are going down.

. 1-month COFI ARM mortgage rates

. 3-month COFI ARM mortgage rates

LIBOR Index: LIBOR is an international index that tracks the world economic situation. It allows international investors to match the cost of loans with the cost of funds. LIBOR compares more closely to the CMT index and is more open to rapid and wide fluctuations than COFI.

. 6-month LIBOR ARM mortgage rates

. 12-month LIBOR ARM mortgage rates

ARM loan with payment option

ARM payment option in a new loan program that allows clients to choose from up to 4 different payments. This loan program is part of an ARM, but with the added flexibility of making one of 4 payments.

Its initial startup rate ranges from 1,000% to around 4,000%. The initial starting rate is maintained for only one month, after the interest rate changes monthly.

4 main options are:

1) Minimum payment: For the first 12 months, the interest rate is calculated using the initial rate after the interest rate is calculated annually.

Example:

Loan amount: $ 200,000.00

Initial rate: 1.25%

Index: 3,326 (MTA as of October 2005)

Margin: 2.75%

Payment limit: 7.5%

Fully indexed rate: 6.076% (index + 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%

Option ARM’s 7.5% payment limit limits how much your payment can increase or decrease each year, except every fifth year (beginning in the 10th year in certain programs), when the limit does not apply. In case your balance exceeds the original loan amount by 125% (110% in NY), the payment amount may change more frequently regardless of the payment limit.

Because you are paying a “minimum payment”, this option will defer the payment of an interest that will be added to your balance.

Minimum payment adjustment period: The minimum payment is generally set at 12 months, unless the negative amortization limit is reached.

Minimum Payment Limit – This is a limit on how much the minimum payment can change. Your payment limit will be 7.5% for the first five years. On your next overdue payment, your minimum payment cannot increase or decrease more than 7.5%. If you do, a loan is reissued.

Refunding (Refunding) or recalculating your loan is a way to limit negative amortization (neg-am). Option ARM’s recast every 5 years. When the loan is consolidated, the payment required to fully repay the loan over the remaining term becomes the new minimum payment.

2) Payment of interest only: With only interest you will avoid deferred interest, because you are paying principal and interest. If you pay only interest or principal, your loan balance will increase because you are adding the principal payment or interest payment to your loan balance, leading to a Neg-Am loan.

Your payment may change monthly based on the ARM index (LIBOR, COFI, MTA).

3) Total 30-year amortization payment: calculated each month based on the previous month’s interest rate, the loan balance, and the remaining term of the loan. When you choose this option, you reduce your principal and pay off your loan on time.

4) Total payment over 15 years: It is calculated from the due date of the first payment.

Negative amortization loan (Neg-Am loan)

Negative amortization loans carry two interest rates. The first is called the payment rate and the second is the real interest rate. The real interest rate is simply calculated as the index plus the margin with no periodic limits. Borrowers can choose what rate to pay. Therefore, negative amortization loan advertisers often refer to these loans as “repayment option” loans.

A loan that allows negative amortization means that the borrower can make a monthly mortgage payment that is less than the interest actually owed for that month. For example, let’s say we have a $ 200,000 loan with an adjustable rate that is currently five percent. The simple interest on this loan is easy to calculate. Multiply the interest rate by the loan amount and you get an annual interest of $ 10,000. Divide $ 10,000 by 12 months and the monthly “interest only” payment is $ 833.33 or just here is the formula for your monthly payment for interest only loans: loan balance x interest rates / 12 = monthly payment.

Now let’s say there is a provision in the loan documents that allows the borrower to make a minimum payment based on a four percent “payment rate”. So your lowest payment would be $ 666.67 because the “payment rate” is based on four percent, not the actual interest rate, which is five percent.

So if you make the lowest payment allowed, you are actually losing $ 166.67 in equity. The loan balance increases to $ 200,166.67.

Exotic mortgage

You may have heard this term before. So what are they?

The newer and exotic mortgages out there include:

1. 40-year mortgage: This is similar to a 30-year fixed-rate mortgage, except that the payment is spread over 10 more years. The lender will charge a slightly higher interest rate, up to 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 few years of a mortgage. After the grace period, the loan essentially becomes a new mortgage and the interest and principal are stretched for only the remaining years. See above for interest-only loans.

3. The Negative Amortization Mortgage: This type of interest-only mortgage allows the buyer to pay less than the full amount of interest. The difference between the total interest payment and the amount actually paid is added to the loan balance. See above for more information.

4. The Piggy Back Mortgage: It is actually two mortgages, one on top of the other. The first mortgage covers 80% of the property’s value. The second hedges the remaining balance at a slightly higher interest rate.

5. 103 and 107: You may not need to save for your down payment. You can borrow 3% or 7% more than your home is worth. These loans give you the option of borrowing money for moving and closing costs. You can include it all in the mortgage.

6. Home Equity Line of Credit: Not Just for Home Owners! Commonly known as HELOCs, they can finance the purchase of an original home using a line of credit 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 interest is tax deductible.