The Mortgage Game (FAQ)

What Kinds of Mortgages Are Available?
How do you decide which loan is best?
What is a Fixed Rate Mortgage?
What is an Adjustable Rate Mortgage?
What is a VA Loan?
What is an FHA Loan?
Convertible ARMs
Two-Step Mortgages
Convertible Loans
Balloon Mortgages
Graduated Payment Mortgage (GPM )
How Can I save on a Fixed Rate Mortgage?
What is private mortgage insurance (PMI)?

What Kinds of Mortgages Are Available?

Fixed-Rate Mortgage -
interest rates and monthly payments remain unchanged for the life of the loan

Adjustable-Rate Mortgage -
interest rates and monthly payments can go up or down, depending on the market

Hybrid Loans -
a combination of fixed and adjustable mortgages

How do you decide which loan is best?

These questions may help.

1. How much cash do you have for a down payment?
2. What can you afford in monthly payments?
3. How might your financial situation change in the near future and beyond?
4. How long do you intend to keep this house?
5. How comfortable would you be with the possibility of your monthly payments increasing?

Discuss these with your lender so they can help you decide which loan would best suit you.

What is a Fixed Rate Mortgage?

This is the most common loan arrangement in the U.S. With a fixed-rate mortgage the loan's principal and interest are amortized, or spread out evenly, over the life of the loan, giving you a predictable monthly payment.

The upside is, if rates are low, you can lock in for as long as 30 years and protect yourself against rising rates. However, if rates fall you can't change your rate without refinancing the loan, and that could cost money.

The 30-year Fixed-Rate Mortgage, the most popular and easiest to qualify for, will give you the lowest payment. But you can also get a 20-, 15- and even a 10-year fixed-rate mortgage if you wish to save interest and pay your home off sooner.

What is an Adjustable Rate Mortgage?

With Adjustable-Rate Mortgages (ARMs) interest rates are tied directly to the economy so your monthly payment could rise or fall. Because you're essentially sharing the market risks with the lender, you are compensated with an introductory rate that is lower than the going fixed rate.

How often does the interest rate change?

That depends on the loan. Changes can occur every six months, annually, once every three years or whenever the mortgage dictates.

How much can my rate change?

Your ARM will stipulate a percentage cap for each adjustment period, which means your interest may not increase beyond that percentage point. If the market holds steady, there may be no increase at all. You may even see your payment decrease if interest rates fall.

How are the changes determined?

Every ARM loan is tied to a financial market index, such as CDs, T-Bills or LIBOR rates. Your rate is determined by adding an additional percentage (known as a margin) to that index's rate. When the index rises or falls, your rate rises or falls with it.

Is there a limit to how much interest I'll be charged?

Yes. It's called a ceiling, or lifetime cap. This is a guarantee that your interest rate will never exceed a designated percentage. For instance, if your introductory rate was 5% and you have a lifetime rate cap of 6% (meaning that your interest rate can never increase more than 6% during the life of the loan) then your ceiling would be 11%.

What are the benefits of an ARM?

* With a lower initial interest rate (usually 2% to 3% lower than fixed-rate mortgages), qualifying is easier and the payments are more manageable at first.

* You may qualify for a larger loan than you would with a fixed-rate mortgage.

* If you're only planning to stay a short time the interest rate is likely to stay lower than that of a fixed-rate mortgage.

* If you expect regular pay increases that would cover the increase in your interest, or if you believe interest rates will fall, an ARM might be the wiser choice.

A few words of caution:

Negative Amortization - This happens when a lender allows you to make a payment that doesn't cover the cost of principal and interest. Watch for this. It may be used as a lure to get you into a home with the promise of low initial payments. Or, a lender may give you a payment cap instead of a rate cap. In this mortgage arrangement, if interest rates increase, your monthly payments could stay the same - but the higher interest will still be charged to your loan, adding to it instead of reducing it. Either way, if you find yourself with a negative amortization ARM, you'll be adding to your debt.

Discounted interest rates - Sometimes a lender will advertise an unusually low initial rate. This is a discounted rate, and it's essentially a marketing tool. If your ARM offers a discounted interest rate you are certain to see an increase at your next adjustment period, even if interest rates don't change.

What is a VA Loan?

Administered by the Department of Veterans Affairs, these special loans make housing affordable for U.S. veterans. To qualify you must be a veteran, reservist, on active duty, or a surviving spouse of a veteran with 100% entitlement.

A VA loan is simply a fixed-rate mortgage with a very competitive interest rate. Qualified buyers can also use a VA loan to purchase a home with no money down, no cash reserves, no application fee and reduced closing costs. Some states allow a VA loan for refinancing as well. There is a 2-3% funding fee paid by the borrower either upfront or added on top of the loan amount. The government charges this fee to offset the cost of such loans. Many lenders are approved to handle VA loans. Your VA regional office can tell you if you're qualified or for more info go to VA.gov.

What is an FHA Loan?

FHA loans are designed to make housing more affordable for first-time homebuyers and those with low to moderate income.

Both fixed- and 1 yr adjustable-rate FHA loans are available, and in most states, an FHA loan can be used for refinancing. The difference is, they're insured by the U.S. Department of Housing and Urban Development (HUD). With FHA Insured loans eligible buyers can put down as little as 3% of the FHA appraisal value or the purchase price, whichever is lower. Qualifying standards are not as strict and the rates are the same as conventional loans. There is a 1.5% Mortgage Insurance Premium(MIP)of the loan amount that, like the VA, is either paid by the borrower upfront or added on top of the loan amount. There is also a monthly mortgage insurance amount you pay.

Convertible ARMs

Some adjustable-rate mortgages allow you to convert to a fixed rate at certain specified times. This mitigates some of the risk of fluctuating interest rates, but there will be a substantial fee to do it. And your new fixed rate may be higher than the going fixed rate.

Two-Step Mortgages

This is an ARM that only adjusts once at five or seven years, then remains fixed for the duration of the loan. Not only will you benefit from a lower rate for the first few years, but the new fixed rate cannot increase by more than 6%. It may even be lower, depending on market conditions. Then again, you also run the risk of adjusting to a much higher rate.

Convertible Loans

Another ARM choice, the convertible loan offers a fixed rate for the first three, five or seven years, then switches to a traditional ARM that fluctuates with the market. If you strongly believe that interest rates will fall a convertible loan might be a smart move.

Balloon Mortgages

These short-term loans begin with low, fixed payments. Then, in five, seven or ten years a single large payment (balloon) for all remaining principal is due. While this saves money up front, coming up with a large payment at the end of the loan may be difficult. Some lenders will allow you to refinance that payment, but some won't, so be sure you know what you're getting into.

Graduated Payment Mortgage (GPM )

With a GPM you pay smaller payments that gradually increase and level off after about five years. Lower payments can make it possible for you to afford a bigger home, but they'll be interest-only payments, adding nothing to the principal. This could put you in a negative amortization situation. back to top

How Can I save on a Fixed Rate Mortgage?

Short Term Mortgages

You don't have to finance your home for 30 years. Granted, the payments will be lower, but you'll be paying them longer. You could, instead, opt for a period of 20, 15 or even 10 years, pay your home off sooner and save in interest. Furthermore, lenders offer much more attractive interest rates with short-term loans, so your payments may not be as much as you'd think.

The table below shows you the interest savings on a $100,000 loan at 8.5% interest:

By paying $215.83 more a month on a 15-year mortgage, you'd save $99,555.83 in interest over a 30-year loan and own the house in half the time.

Bi-Weekly Payments

Instead of paying 12 monthly payments you can choose to make 26 bi-weekly payments. Here's how it works. Each bi-weekly payment is the equivalent of half a monthly payment, but at the end of the year, it totals 13 months instead of 12. A 30-year mortgage could be paid off in 22 years. If you only qualify for a 30-year loan, this is a fabulous way to increase your equity sooner and save on interest.

There are five factors that determine the ultimate cost of a mortgage.

1. The principal , or amount of the loan, is the total amount you borrow (the purchase price minus your down payment).
2. The interest rate adds significantly to the cost of your mortgage. Fixed or adjustable, the interest paid at the end of the loan can exceed the original cost of the home itself. For instance, a $100,000 loan balance at 8.5% for 30 years will cost you $277,000 by the time the loan is retired.
3. The term of the loan is the length of time until the loan is paid off. A longer term means more interest and higher cost.
4. The points are interest paid on the loan and they're purely optional. You pay points at closing if you want to reduce the interest rate and make your monthly payments smaller. One point equals one percent of the loan amount.
5. The fees are paid to the lender at closing to cover the costs of preparing the mortgage. They can vary according to where you live and what type of loan you're securing.

While points and fees are not financed, they still contribute to the cost of the mortgage.

What is Private Mortgage Insurance?

Private Mortgage Insurance, or PMI, is insurance purchased by the buyer to protect the lender in case the buyer defaults on the loan. PMI is generally applied when you put down less than 20% of the home's purchase price. The reason is this:

With 20% down, you are considered a low risk. Even if you default the lender will probably come out ahead because they've only loaned 80% of the home's value and they can probably recoup at least that amount when they sell the foreclosed property.

But with 5% or 10% down, the lender has a lot more invested in the loan and if you default, they will almost surely lose money. This is why lenders require buyers to purchase PMI if they put down less than 20%. It's insurance that, no matter what happens, the lender will recoup its investment.

How does PMI increase your buying power?

In simplest terms, PMI allows you to put less money down, and the benefits are as follows:

• If you have good credit but are short on cash for a down payment you can put as little as 5% down.
• It doesn't take as long to accumulate a 5% or 10% down payment so you could buy a home much sooner than you anticipated.
• A smaller down payment allows you to purchase a larger or nicer home.
• For repeat buyers, a smaller down payment on the new home can free up cash from the sale of their previous home to use for other debts or expenses.
• Your interest will be higher if you put down less than 20%, but that interest is tax-deductible.

What does PMI cost?

A Good Faith Estimate will be provided to you within a few days after we received your loan application. This disclosure will provide you with an estimate of your monthly PMI premium as well as the initial premium you'll need to pay at closing (FHA and VA loans). Additionally, we will be providing you a disclosure on your rights (if applicable) to cancel the PMI.