Choosing a Loan Program
There isn't a single or simple answer to this question. The right type of mortgage for you depends on many different factors:
- Your current financial picture
- How you expect your finances to change
- How long you intend to keep your house
- How comfortable you are with your mortgage payment changing
For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes.
The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences with one of our mortgage professionals.
Contact us at 888.447.7314 to learn more.
Conventional loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.
In general, Fannie Mae and Freddie Mac's single family, first mortgage loan limit is $417,000 in 2006. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes. The current loan limit applies to all conventional mortgages delivered after January 1, 2006.
2006 Conventional Loan Limits
- One-family loans: $417,000
- Two-family loans: $533,850
- Three-family loans: $645,300
- Four-family loans: $801,950
- Note: Maximum original loan amounts are 50 percent higher for first mortgages on properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands. Second Mortgages
- $208,500 (in Alaska, Hawaii, and the US Virgin Islands: $312,750)
Loans which are larger than the limits set by Fannie Mae and Freddie Mac are called jumbo loans. Because jumbo loans are not funded by these government sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payments if your purchase or refinance balance is above $417,000 is to use a combination of both first and second trust money, referred to as an 80/10/10, 80/15/5 or 80/20. Every situation is different, but it is one more option to consider.
In addition to common loan structures such as fixed rate, adjustable rate and balloon loans, Fannie Mae and Freddie Mac also have loan programs for low to no down payments, community lending and affordable housing initiatives, construction to permanent, home improvement and reverse mortgages.
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Fixed Rate Mortgages
This is the most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.
Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.(1 extra monthly payment per year)
Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount. Speak with one of our mortgage professionals to find out which program suits your individual needs best.
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Standard ARMS and the Differences
A few options are available to fit your individual needs and your risk tolerance with the various market instruments.
ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.
The interest rate and monthly payment can change based on adjustments to the index rate.
6-Month Certificate of Deposit (CD) ARM
This program has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.
1-Year Treasury Spot ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
This program has a maximum interest rate adjustment of 2% every 12 months. The Treasury Average Index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
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Option ARM Mortgages
The Options Adjustable Rate Mortgage is an ARM (Adjustable rate Mortgage) like most others in its origins. It consists of taking an index, most commonly the MTA (12 month Treasury Average), CODI (Cost of Deposit Index), and COSI (Cost of Savings Index), then adding a margin to total the final interest rate.
Unlike other ARM's where the principal and interest or simple interest payment is calculated from the total of the index and margin, the Options ARM offers 4 monthly payment options every month, giving you the opportunity to choose which payment gets made based on your economic condition at the time the payment is due. This monthly payment option is where the Options ARM derives its most common name. Other names the Option ARM is known by are: Cash-Flow ARM's, Pay Option ARM's, and Pick a Payment Loans.
What are the Indexes?
There are 5 types of commonly used indices. Each index is influenced by different forces acting upon it. The thing to remember about the index is that it always fluctuates. An index never gets locked in when the loan closes, only the margin gets locked in at closing. The following is the list of each index and a brief description of how the index works:
- MTA - The 12 month Treasury Average. It takes the previous 12 monthly values of the 1 year CMT (US Treasury Security) and averages them creating a much more stable index than the CMT itself.
- CODI - The Cost of Deposit Index is the 12 month average of the monthly averaged yields on the nationally published 3 month Certificate of Deposit Rates.
- COFI - The 11th District Cost of Funds Index reflects the average interest rate paid by the member banks and savings institutions located in Arizona, California and Nevada. The largest part of this index is based on savings accounts so it will move more slowly to market swings. The COFI has long been considered the most stable and popular of indices associated with the Options ARM.
- COSI - The Cost of Savings Index is the hardest to track but arguably the least volatile. The COSI index is the weighted average of the rates of interest paid on depository accounts held with World Savings. The index is calculated at the end of every month and then averaged with the previous 12 months creating a very stable index.
What is the Margin? A margin is defined as the difference between the interest rate and the index on an Adjustable Rate Mortgage. The lender determines what the margin shall be at the time your loan closes. The number of percentage points the lender adds to calculate the ARM interest rate at each adjustment period (i.e. the Margin), will be locked in at closing, the index is never locked in as previously mentioned. The margin will remain fixed during the entire term of the loan and can never be impacted by upswings or downswings in the economy. The margin will be added to each adjustment period to calculate what your rate will be for that upcoming period.
What are the Payment Options?
There are typically 4 payment options to choose from each month and you actually get to elect which one you make. This is the primary advantage of choosing this type of mortgage. These options will help you better manage your monthly cash flow, and provide more liquidity in the day to day operations of the normal household. The monthly payment options you have each month will depend on which version of this hybrid loan program you have. The following is the basic options that exist:
- THE MINIMUM PAYMENT OPTION
- INTEREST ONLY PAYMENT
- 30-YEAR PAYMENT
- 15-YEAR PAYMENT
The minimum payment option is the LOWEST of the 4 payments and should be considered like a credit card payment for the simple reason that with this payment you are paying neither the principal nor the entire amount of interest due on the loan. The interest that does not get paid gets added back into the interest due on the loan and this increases your actual loan balance - This is called NEGATIVE AMORTIZATION, OR DEFERRED INTEREST.
The interest only payment - you avoid deferring interest but at the same time you are not making a principal reduction payment. This payment option is your second lowest payment type. As with most interest only payment loans, there is a clause in the mortgage note that will dictate how long you can make interest only payments.
The 30-year payment or 30-Year Fully Amortizing Payment is the regular vanilla payment most people are probably used to making with payment going towards principal and interest. Consistently making this payment will payoff the loan in 30-Years.
The 15-year payment or Accelerated Payment Option will payoff the loan in 15 Years - both principal and interest are being paid.
- LIFETIME CAPS - Will set a maximum on how high your interest rate can increase over the life of the loan.
- START RATES - will also vary by lender and index as well. They will typically start at 1.25% to 4.25% and are heavily influenced by how much you put down as well as your credit standing. Those with more equity may likely see a lower rate.
This loan program is not for everybody; however, for those comfortable with a little risk, in exchange for a great deal of flexibility together with the discipline to check the mortgage statement every month, this could be the right loan.
It is a great loan for someone wishing to leverage their house as an investment, and invest some of those hard earned dollars elsewhere for possibly a greater return, for example an annuity offered by a financial planner. It is also excellent for those that derive their income from commissions or any other potentially fluctuating source.
In the United States, a jumbo mortgage is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits. This standard is set by the two largest secondary market lenders, Fannie Mae and Freddie Mac. Loans above the conforming limits may be offered by seller servicers of these wholesale institutions, as well as Wall Street conduits who provide warehouse financing for mortgage lenders. The loan amounts reflect average loan sizes nationwide. Jumbo mortgages apply when agency limits don't cover the full loan amount. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of residential mortgages in the U.S. They set a limit on the maximum dollar value of any mortgage they will purchase from an individual lender. As of 2006, the limit is $417,000, or $625,500 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Other large investors, such as insurance companies and banks, step in to fill the need, with maximum mortgage amounts in the several million dollar range. A loan in excess of $650,000 is referred to as a super jumbo mortgage. The average interest rates on jumbo mortgages are typically greater than is normal for conforming mortgages, and vary depending on property types and mortgage amount.
We offer several different Jumbo Loan programs tailored to fit your individual real estate purchasing needs. We offer Full documentation, light documentation, and no document or stated loans. Please contact one of our Jumbo Loan specialists to learn more.
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Full Doc Loans
With Full Documention Loans all income and assets are documented. Income is documented using paystubs and W-2s for salaried borrowers. Self-employed borrowers use federal tax returns to verify income. See below or ask one of our mortgage loan representatives for a complete checklist of items needed for a Full Doc loan. This checklist covers most supporting documents you and any co-borrower will need to supply. Once you apply, your representative provides you with a detailed list of documentation required to approve your loan.
Loan Application Checklist
This is a list of documents most lenders will require in order to process your mortgage application.
Verification of income
- Earnings statements: W-2 forms, recent pay stubs and tax returns for the past two years;
- If you are self-employed: profit and loss statements and tax returns for current year and previous two years;
- Additional income: social security, overtime bonus, commission, interest income, veteran's benefits and so on. Verification of your assets
- List of bank account numbers, the address of your bank branch, checking and savings account statements for the previous 2-3 months;
- List of savings bonds, stocks or investments and their approximate market values;
- Copies of titles to any motor vehicles that are paid in full.
- Information about the purchase
- Copy of the ratified purchase contract;
- If you made a deposit to the seller to show that you are serious about buying the house, bring a copy of canceled deposit check on house. Your debts
- Credit card bills for the past few billing periods;
- Other consumer debt such as car loans, furniture loans, student loans and other personal and cosigned installment loans with creditor addresses and phone numbers;
- Evidence of mortgage and/or rental payments;
- Copies of alimony or child support.
If you have no established credit history, supply your mortgage loan representative with canceled checks for rent, utilities and other recurring obligations to show payment history and amount of revolving debt.
Lenders may also ask you about the origin of your downpayment. If money for downpayment is a gift from a relative, provide a copy of gift letter and copy of gift check. The gift letter states that the money will not have to be repaid.
Having these items on hand when will help speed up the application process.
Keep in mind that different lenders may have slightly different information requirements, so ask your mortgae loan representative what to bring to your initial loan interview.
Easy Doc and No Doc Loans
With Easy / No Doc loans little or no documentation is provided to substantiate the borrower's income and assets.
These loans are mostly for self-employed borrowers who have difficulty verifying all of their income, and for service industry employees, such as bartenders, waiters, and hair stylists that have pay which is difficult to determine precisely. These loans may be also used by borrowers who get most of their income from commissions, such as sales professionals or by borrowers with very complex income structures. For example, a borrower who has income primarily from rental properties and investments may be hesitant to verify all sources of income due to the volumes of paperwork this would require. Additionally, borrowers who receive a good portion of their income in cash, such as tips, might also want to consider the Easy Doc loan.
Because of the risk associated with Easy / No Doc loans, a borrower may have to make a larger down payment. In many cases, the LTV on a Easy / No Doc loan is limited. We have several programs that will allow up to a 95% LTV. Ask your mortgage loan representative for more info on LTV rates.
Credit standards are generally a little higher for Easy / No Doc loans. Borrowers must have maintained a good repayment history within the last two years. Additionally, some lenders will require borrowers to maintain higher bank balances than typical applicants must have.
Lenders will assess higher interest rates and fees on loans when little or no documentation is provided to substantiate the borrower's income. Expect the interest rate to be about one-half to one percent more than the rates on a fully documented loan. Consequently, Easy and No Doc loans should only be used when necessary, not simply to avoid the paperwork requirements of a Full Documentation loan.
Easy and No Doc loans could be classified into "Stated Income", "Stated Assets", "No Income Verification (NIV)", "No Income / No Asset (NINA)", "No Ratio", etc. With a "Stated Income" loan, the borrower can simply state his income on the application, and will not have to provide any documentation to substantiate this stated income. Lenders usually verify that the borrower has assets that logically match the stated income. With "No Income / No Asset" loan no income and no assets are verified.
Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.
At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.
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