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All mortgage loan programs plans can be
divided into categories in two
different ways. First, conventional and
government loans. Secondly, all the
various mortgage programs may be
classified as fixed rate loans,
adjustable rate loans and their
combinations.
Conventional and Government
Loans
Any mortgage loan other than an FHA, VA
or an RHS loan is conventional one.
FHA Loans
The Federal Housing Administration
(FHA), which is part of the U.S. Dept.
of Housing and Urban Development (HUD),
administers various mortgage loan
programs. FHA loans have lower down
payment requirements and are easier to
qualify than conventional loans. FHA
loans cannot exceed the statutory limit.
VA loans are guaranteed by U.S. Dept. of
Veterans Affairs. The guaranty allows
veterans and service persons to obtain
home loans with favorable loan terms,
usually without a down payment. In
addition, it is easier to qualify for a
veterans loan than a conventional loan.
Lenders generally limit the maximum
veterans loan to $203,000. The U.S.
Department of Veterans Affairs does not
make loans, it guarantees loans made by
lenders. VA determines your eligibility
and, if you are qualified, VA will issue
you a certificate of eligibility to be
used in applying for a VA loan.
VA-guaranteed loans are obtained by
making application to private lending
institutions. If you are interesting in
obtaining a VA-guaranteed loan see
pamphlets published by VA.
RHS Loan Programs
The Rural Housing Service (RHS) of the
U.S. Dept. of Agriculture guarantees
loans for rural residents with minimal
closing costs and no down payment.
Ginnie Mae which is part of HUD
guarantees securities backed by pools of
mortgage loans insured by these three
federal agencies - FHA, or VA, or RHS.
Securities are sold through financial
institutions that trade government
securities.
State and Local Housing Programs
Many
states, counties and cities provide low
to moderate housing finance programs,
down payment assistance programs, or
programs tailored specifically for a
first time buyer. These programs are
typically more lenient on the
qualification guidelines and often
designed with lower upfront fees. Also,
there are often loan assistance programs
offered at the local or state level such
as MCC (Mortgage Credit Certificate)
which allows you a tax credit for part
of your interest payment. Most of these
programs are fixed rate mortgages and
have interest rates lower than the
current market.
Conforming Loans
Conventional loans may be conforming and
non-conforming. Conforming loans have
terms and conditions that follow the
guidelines set forth by Fannie Mae and
Freddie Mac. These two stockholder-owned
corporations purchase mortgage loans
complying with the guidelines from
mortgage lending institutions, packages
the mortgages into securities and sell
the securities to investors. By doing
so, Fannie Mae and Freddie Mac, like
Ginnie Mae, provide a continuous flow of
affordable funds for home financing that
results in the availability of mortgage
credit for Americans.
Fannie Mae and Freddie Mac guidelines
establish the maximum loan amount,
borrower credit and income requirements,
down payment, and suitable properties.
Fannie Mae and Freddie Mac announces new
loan limits every year. The 1999
conforming loan limits for first
mortgages are:
|
Loan Limits for 1999 |
Loan Limits for 1998 |
One-family: |
$240,000
|
$227,150 |
Two-family: |
$307,100 |
$290,650 |
Three-family: |
$371,200 |
$351,300 |
Four-family: |
$461,350
|
$436,600 |
These loan limits are
increased by 50% for loans made in
Alaska, Hawaii, Guam and the U.S. Virgin
Islands.
Properties with five or
more units are considered commercial
properties and are handled under
different rules.
Jumbo Loans
Loans above the maximum loan amount
established by Fannie Mae and Freddie
Mac are known as 'jumbo' loans. Because
jumbo loans are bought and sold on a
much smaller scale, they often have a
little higher interest rate than
conforming, but the spread between the
two varies with the economy.
B/C Loans
Loans that do not meet
the borrower credit requirements of
Fannie Mae and Freddie Mac are called
'B', 'C' and 'D' paper loans vs. 'A'
paper conforming loans.
B/C loans are offered to borrowers that
may have
recently filed for bankruptcy,
foreclosure, or have had late payments
on their credit reports. Their purpose
is to offer temporary financing to these
applicants until they can qualify for
conforming "A" financing. The interest
rates and programs vary,
based upon
many factors of the borrower's financial
situation and
credit
history.
Moving to Boston
With
fixed rate mortgage (FRM) loan
the interest rate and your mortgage
monthly payments remain fixed for the
period of the loan. Fixed-rate mortgages
are available for 30, 25, 20, 15 years
and 10 years. Generally, the shorter the
term of a loan, the lower the interest
rate you could get.
The most popular mortgage terms are 30
and 15 years. With the traditional
30-year fixed rate mortgage your monthly
payments are lower than they would be on
a shorter term loan. But if you can
afford higher monthly payments a 15-year
fixed-rate mortgage allows you to repay
your loan twice as faster and save more
than half the total interest costs of a
30-year loan.
The payments on fixed
rate fully amortizing loans are
calculated so
that at the
end of the term the mortgage loan is
paid in full.
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.
With bi-weekly mortgage plan you pay
half of the monthly mortgage payment
every 2 weeks. It allows you to repay a
loan much faster. For example, a 30 year
loan can be paid off within 18 to 19
years.
Balloon Loans
Balloon loans are short-term fixed rate
loans that have fixed monthly payments
based usually upon a 30-year fully
amortizing schedule and a lump sum
payment at the end of its term. Usually
they have terms of 3, 5, and 7 years.
The advantage of this
type of loan is that the interest rate
on
balloon loans is
generally lower than 30- and 15- year
mortgages resulting in lower monthly
payments. The disadvantage is that at
the end of the term you will have to
come up with a lump sum to pay off your
lender, either through a refinance or
from your own savings.
Balloon loans with refinancing option
allow borrowers to convert the mortgage
at the end of the balloon period to a
fixed rate loan -- based upon the
outstanding principal balance -- if
certain conditions are met. If you
refinance the loan at maturity you need
not be re-qualified, nor the property
re-approved. The interest rate on the
new loan is a current rate at the time
of conversion. There might be a minimal
processing fee to obtain the new loan.
The most popular terms are 5/25 Balloon,
and 7/23 Balloon.
Adjustable Rate Mortgages
Variable or adjustable loan is loan
whose interest rate, and accordingly
monthly payments, fluctuate over the
period of the loan. With this type of
mortgage, periodic adjustments based on
changes in a defined index are made to
the interest rate. The index for your
particular loan is established at the
time of application.
Well known indices include :
1.
Treasury Security Indexes
-- Yields on United States Treasury
Securities adjusted to constant
maturities. When using Treasury
Securities, the ARM's adjustment
period is usually the same as the
security's constant maturity.2.
Treasury Bills -- Commonly
called T-bills they come in
denominations of 3 months, 6 months
and 1 year. Depending on which three
of these security index schedules
you choose, the interest rate on
your
Adjustable Rate Mortgage (ARM) will
adjust once every six months, once
each year, or once every three
years.
3.
London Inter Bank Offering Rates
(LIBOR) -- Interest rates
at which international banks lend
and borrow funds in the London
interbank market.
4.
Certificate of Deposit Indexes
-- Average rates that you get when
you invest in a 1- , 3- or 6-month
CD.
5. 11th District Cost of Funds Index
(COFI) -- This index
reflects the weighted-average
interest rate paid by 11th Federal
Home Loan Bank District savings
institutions for savings accounts
and other sources of funds. ARMs
based on this index can adjust every
month, every six months, or every
year.
6.
Prime Rate -- An interest
rate offered to banks best
customers.
Historical and current values for some
ARM's indexes are available on our site.
You can also find values of indexes in
the H15 Federal Reserve statistical
release and in business newspapers.
New interest rate = index +
margin |
The margin is fixed percentage points
added to the index to compute the
interest rate. The result will then be
rounded to the nearest one-eighth of a
percent.
-
Example:
The index is 5.3% and the margin is
2.5%,
then the new interest rate = 5.3% +
2.5% = 7.8%.
The nearest to 0.8% is 0.75% = 6/8%.
The result will be 7.75%.
The margins remain fixed for the term of
the loan and are not impacted by the
financial markets and movement of
interest rates. Lenders use a variety of
margins depending upon the loan program
and adjustment periods.
Most ARMs have an interest rate caps to
protect you from enormous increases in
monthly payments. A lifetime cap limits
the interest rate increase over the
life of the loan. A periodic or
adjustment cap limits how much your
interest rate can rise at one time.
-
Examples:
1. The initial interest rate is
4.5%, the index is 7%, and the
margin is 3%, then the new interest
rate = 7% + 3% = 10%. If the
lifetime cap is 5% then the actual
new interest rate will be 4.5% + 5%
= 9.5%.
2. The initial interest rate is 6%,
the index is 5%, and the margin is
3%, then the new interest rate = 5%
+ 3% = 8%. If the periodic cap is 1%
then the actual new interest rate
will be 6% + 1% = 7%.
Your mortgage disclosure will tell you
the exact index, to be used, whether the
weekly or monthly value applies, the
lead time for your index, the margin,
and any caps.
Negatively Amortizing Loans
Some types of ARMs offer payment caps
rather than interest rate caps, which
limit the amount the monthly payment can
increase. If a loan has payment cap but
has no periodic interest rate cap, then
the loan may become negatively
amortized: if the interest rates rise to
the point that the monthly mortgage
payment does not cover the interest due,
any unpaid interest will get added to
the loan balance, so the loan balance
increases. However, you always have the
option to pay the minimum monthly
payment, or the fully
amortized amount due.
Example:
Your loan has a payment cap of 7.5%.
If your payment is $1,000 per month
and interest rates rise, your new
payment would normally be $1200/mo
(for example). But your capped
payment is only $1075. The other
$125 get added to your loan balance,
to be paid off over time, unless of
course you decide to pay that
additional amount now.
The
advantage of negatively amortizing loans
is that you can control cash flow
(relatively stable payment), take
advantage of low interest rates
relative to the market at any given
time, and pay back the money borrowed
today at a depreciated value years from
now (because of natural inflation). This
makes such loans a great tool for
homeowners as long as you understand the
mechanics of what's going on.
With most ARMs, the
interest rate can adjust every six
months, once a year, every three years,
or every five years. The interest rate
on negatively amortized loans can adjust
monthly. A
loan with an adjustment period of 6
months is called a 6-month ARM, with an
adjustment period of 1 year is called a
1-year ARM, and so on.
Most ARMs offer an initial lower
interest rate than the fully indexed
rate (index plus margin) during the
initial period of the loan, which could
be one month or a year or more. It is
also known as teaser rate.
All ARMs are available with 30-year
terms and some with 15-year terms.
Adjustable rate mortgages generally have
a lower initial interest rate than fixed
rate loans.
Combined (Hibrid) Loans
Hibrid loans, a combination of fixed and
ARM loans, come in different varieties:
Fixed-period ARMs
With fixed-period ARMs homeowners can
enjoy from three to ten years of fixed
payments before the initial interest
rate change. At the end of the fixed
period, the interest rate will adjust
annually. Fixed-period ARMs -- 30/3/1,
30/5/1, 30/7/1 and 30/10/1 -- are
generally tied to the one-year Treasury
securities index. ARMs with an initial
fixed period beside of lifetime and
adjustment caps usually have also first
adjustment cap. It limits the interest
rate you will pay the first time your
rate is adjusted. First adjustment caps
vary with type of loan program.
The advantage of these loans is that the
interest rate is lower than for a
30-year fixed (the lender is not locked
in for as long so their risk is lower
and they can charge less) but you still
get the advantage of a fixed rate for a
period of time.
Two-Step Mortgage
Two-Step mortgages have a fixed rate for
a certain time, most often 5 or 7 years,
and then interest rate changes to a
current market rate. After that
adjustment the mortgage maintains new
fixed rate for the remaining 23 or 25
years.
Convertible ARMs
Some ARMs come with option to convert
them to a fixed-rate mortgage at
designated times (usually during the
first five years on the adjustment
date), if you see interest rates
starting to rise. The new rate is
established at the current market rate
for fixed-rate mortgages.
The conversion is typically done for a
nominal fee and requires almost no
paperwork. The disadvantage is that the
conversion interest rate is typically a
little higher than the market rate at
that time.
The other kind of convertible mortgage
is a fixed rate loan with rate reduction
option. If rates had dropped since the
time of closing it allows you, under
some prescribed conditions, for small
conversion fee to adjust your mortgage
to going market rate. Generally the
interest rate or discount points may be
a little higher for a convertible loan.
Graduated Payment Mortgages (GPMs)
Graduated payment
mortgages have payments that start low
and gradually increase at predetermined
times. A lower initial payments
allow you to
qualify for a larger loan amount. The
monthly payments will eventually be
higher in order to catch up
from the
lower payments. In fact, your loan will
be negatively amortizing during the
early years of the loan, then pay off
the principal at an accelerated pace
through the later years.
Lenders offer different GPM payment
plans, which vary in the rate of payment
increases and the number of years over
which the payments will increase. The
greater the rate of increase or the
longer the period of increase, the lower
the mortgage payments in the early
years.
Example
The following
table compares the monthly payment
schedule
of a 30 year fixed rate loan with
the most frequently used GPM plan.
In this plan payments increase 7.5
percent each year for 5 years before
leveling off.
The example uses a mortgage with a
loan amount of $60,000 and an
interest rate of 10 percent.
Year |
30 year fixed |
GPM loan |
1 |
526.80 |
400.22 |
2 |
526.80 |
430.24 |
3 |
526.80 |
462.50 |
4 |
526.80 |
497.20 |
5 |
526.80 |
534.49 |
6 |
526.80 |
574.57 |
7 - 30 |
526.80 |
574.57 |
Buy-down Mortgage
A temporary buydown is
the type of loan with an initially
discounted interest rate which gradually
increases to an agreed-upon fixed rate
usually within one to three years. An
initially discounted rate
allows you to qualify for more house
with the same income and gives you the
advantage of lower initial monthly
payments for the first years of the loan
when extra money may be needed for
furnishings
or home improvements. To reduce your
monthly payments during the first few
years of a mortgage you make an initial
lump sum payment to the lender. If you
do not have the cash to pay for the
buydown, the lender can pay this fee if
you agree on a little higher interest
rate.
A very popular buydown is the 2-1
buydown.
Example
If the interest rate
on the note is 8% with a 2-1 buydown
mortgage your initial discounted
rate is 6% and you would have 6%
interest rate for the first year, 7%
for the second year, and 8%
afterwards.
You will need to prepay the
difference in payments between the
6% and 8% rates the first year, and
between the 7% and 8% rates the
second year.
3-2-1 and 1-0 buydowns are also
available, though less common.
Compressed Buydown, works the same way,
but with the interest rate changing
every six months instead of on a yearly
basis.
The lower rate may apply for the full
duration of the loan or for just the
first few years. A buydown may be used
to qualify a borrower who would
otherwise not qualify . This is because
a buydown results in lower payments
which are easier to qualify for.
With a
variety of different loan programs
available, it is important to choose the
type of loan that will best suit your
needs.
The right type of mortgage chiefly
depends on how long you plan on staying
in the house and the amount of monthly
payment you can comfortably afford.
If you don't plan to stay in your house
for at least 5 to 7 years, it will be
reasonable to consider an Adjustable
Rate Mortgage, Balloon Mortgage or
Two-Step Mortgage. ARMs traditionally
offer lower interest rates during the
early years of the loan than fixed-rate
loans. A Two-Step Mortgage will give you
a lower interest rate than a 30-year
mortgage for the first five or seven
years. A Balloon Mortgage offers lower
interest rates for shorter term
financing, usually five or seven years.
Because of a lower interest rate it is
easy to qualify for these type of
mortgages. However don't accept the ARM
unless you can afford the maximum
possible monthly payment.
Generally, you can start to consider 15
or 30 year fixed rate mortgages if you
plan to stay in your home for more than
seven years.
RECENT MORTGAGE HEADLINES |
30-year mortgages lowest since April
2004
HOUSTON, TEXAS
- Average interest
rates on 30-year mortgages fell this
week to the lowest in more than a
year, mortgage finance company
Freddie Mac said on Thursday.
It said weaker economic data fueled
speculation that the Federal Reserve
might slow its upward march on
short-term borrowing costs to head
off inflation. However, Fed chief
Alan Greenspan, in testimony to
Congress on Thursday, signaled
further increases in interest rates.
U.S. 30-year mortgage rates eased to
an average of 5.56 percent in the
week ended June 9 from 5.62 percent
a week earlier. It marked the lowest
level for 30-year loans since they
averaged 5.52 percent in the April
1, 2004, week.
Frank Nothaft, Freddie Mac vice
president and chief economist, said
despite the recent slide in
mortgages, 30-year rates will rise
to an average between 5.9 percent
and 6.2 percent later this year.
Freddie Mac said 15-year mortgages
fell to an average of 5.14 percent
from 5.20 percent. One-year
adjustable rate mortgages also
slipped, to 4.21 percent from 4.26
percent.
Greenspan on Thursday dismissed
concerns that a rash of recent
economic reports, highlighted by
last Friday's weaker-than-expected
May employment report, was evidence
of an economic slowdown.
"Despite some of the risks that I
have highlighted, the economy seems
to be on a reasonably firm footing,
and underlying inflation remains
contained," he said in testimony to
the congressional Joint Economic
Committee.
The Federal Reserve has raised
interest rates eight times since
last June to reign in inflationary
pressures.
Employers added only 78,000 workers
to their payrolls in May, the
weakest job growth in 21 months, the
Labor Department said last week.
Still, the job market showed some
bullish signs as the unemployment
rate edged down to 5.1 percent, its
lowest since September 2001, from
April's 5.2 percent.
"Markets are now speculating whether
the Fed will continue raising rates
at the same pace that it has been,
or will it begin to moderate the
frequency of its actions," said
Nothaft, referring to the weak jobs
report.
Freddie Mac said lenders charged an
average of 0.6 percent in fees and
points on 30-year mortgages and on
the one-year ARM, both unchanged
from a week ago. Fifteen-year
mortgages had fees and points of 0.5
percent, down from 0.6 percent.
Freddie Mac also said the hybrid
"5/1" ARM, set at a fixed rate for
five years, then adjustable each
year following, fell to 5.01 percent
from 5.10 percent.
A year ago, 30-year rates averaged
6.30 percent, 15-year mortgages 5.67
percent and the ARM 4.14 percent.
Freddie Mac is a mortgage finance
company chartered by Congress that
buys mortgages from lenders and
packages them into securities to
sell to investors or to hold in its
own portfolio.
Houston
Mortgage Company
2550
Gray Falls # 165
Houston, TX 77077
Refinance your home today at Houston Mortgage!
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