Which
type of loan is best for you? There isn't a single or simple answer
to this question. The right type of mortgage for you depends on many
different factors:
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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
frankly with Norin Khan at 707-365-3090 to discuss which type of loan is
best for you.
Believe me it is doable and we have
done it several time. The only requirement is to have a good credit
with over 600 FICO score. If you a comfortable and can handle a
certain amount of monthly payment, but you do not have a single dime
in your pocket to purchase a home, here is how you can buy a home.
Most mortgages require a minimum of 5%
of down payment; even that is not a problem. But why bother with it.
You can actually finance 100% of purchase price by having two loans;
one for 80% of the purchase price and the other for 20% of the
purchase price. So you do not require any down payment. Plus there
is no mortgage insurance required on such loan. Now the only money
you need is the closing cost on the home which can run about 3% to
3.5% of the purchase price. You also need approximately $1,000 for
inspections, etc. You simply ask your realtor to locate a nice
property which would appraise 10K to 15K above asking price. Buy the
property at the higher price and the ask seller to pay for your
closing costs. Some lender let seller pay for only non-recurring
closing costs, but some others let seller pay any and everything.
Let's assume you have a lender that only allows seller to pay for
non-recurring closing costs. Then the question is how would you pay
for the rest of closing costs. The answer is ask seller to pay you
money for carpet credit or any other repair credit in the house
(even if there is no repair required in the house). Make your this
arrangement is not part of your purchase contract, but a separate
addendum along with the purchase contract, because lender do not
want to know about these arrangements. Now use the credit towards
rest of the closing costs. Poof! you have a home without a single
dime out of your pocket. Now live in this home for a few years,
build some equity and then use that equity as a down payment towards
the purchase of a new home.
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These types of loans are great if you
do not plan to live in a property for a long period of time and you
are buying a property to rent out or actually planning to cash out
the equity. Most people although get a 30 year fix loan, but perhaps
95% of people do not keep the same property for the entire period.
According to statistics, people on average keep their home for
approximately 7 years before selling. So why do they get 30-year
mortgage is certainly not a sound decision. Having short term
mortgage like 10-year or 15-year mortgage will be a better decision.
A short term mortgage offers better interest rates and more of your
payment goes towards payment of the principal. But, the problem is
that some people can't afford the higher payment of these short term
mortgages and still they want to buy a bigger and better home and
are more interested in the equity build-up of such home than paying
off a mortgage. The answer is an interest only loan. The payment are
the lowest of any other loan. You can afford a bigger and better
home, keep the home for a few years and simply cash out the equity
to invest in an even bigger and better property.
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Can't prove your income, but can afford a lot of home using
Stated Income Mortgage
In qualifying for these products, the lender will not require you to
provide standard explanations of your income, such as tax returns,
pay stubs, bank statements, etc. This means that there is no
verification of your income, but you must state the source of your
income. Individuals likely to be interested in a stated income loan
are typically self-employed or individuals who write-off a large
portion of their income such as contractors, waiters & waitresses.
The rates of stated income mortgages are slightly higher than full
doc loans.
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 "bi-weekly" 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.)
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.
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 These
loans generally begin with an interest rate that is 2-3 percent
below a comparable fixed rate mortgage, and could allow you to buy a
more expensive home.
However, the interest rate changes at specified
intervals (for example, every year) depending on changing market conditions; if
interest rates go up, your monthly mortgage payment will go up, too. However, if
rates go down, your mortgage payment will drop also.
There are also mortgages that combine aspects of
fixed and adjustable rate mortgages - starting at a low fixed-rate for seven to
ten years, for example, then adjusting to market conditions. Ask Norin Khan
about these and other special kinds of mortgages that fit your specific
financial situation
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
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
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
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
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.
Most adjustable rate mortgages (ARMs) have a low
introductory rate or start rate, some times as much as 5.0% below the current
market rate of a fixed loan. This start rate is usually good from 1 month to as
long as 10 years. As a rule the lower the start rate the shorter the time before
the loan makes its first adjustment.
Index - The index of an ARM is the
financial instrument that the loan is "tied" to, or adjusted to. The most common
indices, or, indexes are the 1-Year Treasury Security, LIBOR (London Interbank
Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District
Cost of Funds (COFI). Each of these indices move up or down based on conditions
of the financial markets.
Margin - The margin is one of the most
important aspects of ARMs because it is added to the index to determine the
interest rate that you pay. The margin added to the index is known as the fully
indexed rate. As an example if the current index value is 5.50% and your loan
has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range
from 1.75% to 3.5% depending on the index and the amount financed in relation to
the property value.
Interim Caps - All adjustable rate loans
carry interim caps. Many ARMs have interest rate caps of six-months or a year.
There are loans that have interest rate caps of three years. Interest rate caps
are beneficial in rising interest rate markets, but can also keep your interest
rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have payment caps
instead of interest rate caps. These loans reduce payment shock in a rising
interest rate market, but can also lead to deferred interest or "negative
amortization". These loans generally cap your annual payment increases to 7.5%
of the previous payment.
Lifetime Caps - Almost all ARMs have a
maximum interest rate or lifetime interest rate cap. The lifetime cap varies
from company to company and loan to loan. Loans with low lifetime caps usually
have higher margins, and the reverse is also true. Those loans that carry low
margins often have higher lifetime caps.
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A reverse mortgage is a special type of loan made
to older homeowners to enable them to convert the equity in their home to cash
to finance living expenses, home improvements, in-home health care, or other
needs.
With a reverse mortgage, the payment stream is
"reversed." That is, payments are made by the lender to the borrower, rather
than monthly repayments by the borrower to the lender, as occurs with a regular
home purchase mortgage.
A reverse mortgage is a sophisticated financial
planning tool that enables seniors to stay in their home -- or "age in place" --
and maintain or improve their standard of living without taking on a monthly
mortgage payment. The process of obtaining a reverse mortgage involves a number
of different steps.
The first, most widely available reverse mortgage
in the United States was the federally-insured Home Equity Conversion Mortgage (HECM),
which was authorized in 1987.
A reverse mortgage is different from a home equity
loan or line of credit, which many banks and thrifts offer. With a home equity
loan or line of credit, an applicant must meet certain income and credit
requirements, begin monthly repayments immediately, and the home can have an
existing first mortgage on it. In addition, there is no restriction on the age
of borrowers.
In general, reverse mortgages are limited to
borrowers 62 years or older who own their home free and clear of debt or nearly
so, and the home is free of tax liens.
Borrowers usually have a choice of receiving the
proceeds from a reverse mortgage in the form of a lump-sum payment, fixed
monthly payments for life, or line of credit. Some types of reverse mortgages
also allow fixed monthly payments for a finite time period, or a combination of
monthly payments and line of credit. The interest rate charged on a reverse
mortgage is usually an adjustable rate that changes monthly or yearly. However,
the size of monthly payments received by the senior doesn't change.
Some reverse mortgage products also involve the
purchase of an annuity that can assure continued monthly income to the senior
homeowner even after they sell the home.
The size of reverse mortgage that a senior
homeowner can receive depends on the type of reverse mortgage, the borrower's
age and current interest rates, and the home's property value. The older the
applicant is, the larger the monthly payments or line of credit. This is because
of the use of projected life expectancies in determining the size of reverse
mortgages.
Seniors do not have to meet income or credit
requirements to qualify for a reverse mortgage.
Unlike a home purchase mortgage or home equity
loan, a reverse mortgage doesn't require monthly repayments by the borrower to
the lender. A reverse mortgage isn't repayable until the borrower no longer
occupies the home as his or her principal residence.
This can occur if the sole remaining borrower
dies, the borrower sells the home, or the borrower moves out of the home, say,
to a nursing home.
The repayment obligation for a reverse mortgage is
equal to the principal balance of the loan, plus accrued interest, plus any
finance charges paid for through the mortgage. This repayment obligation,
however, can't exceed the value of the home.
The loan may be repaid by the borrower or by the
borrower's family or estate, with or without a sale of the home. If the home is
sold and the sale proceeds exceed the repayment obligation, the excess funds go
to the borrower or borrower's estate. If the sales proceeds are less than the
amount owed, the shortfall is usually covered by insurance or some other party
and is not the responsibility of the borrower or borrower's estate. In general,
the repayment obligation of the borrower or borrower's estate can't exceed the
value of the property.
In general, a borrower can't be forced to sell
their home to repay a reverse mortgage as long as they occupy the home, even if
the total of the monthly payments to the borrower exceeds the value of the home.
LIBOR is the rate on dollar-denominated deposits,
also know as Eurodollars, traded between banks in London. The index is quoted
for one month, three months, six months as well as one-year periods.
LIBOR is the base interest rate paid on deposits
between banks in the Eurodollar market. A Eurodollar is a dollar deposited in a
bank in a country where the currency is not the dollar. The Eurodollar market
has been around for over 40 years and is a major component of the International
financial market. London is the center of the Euromarket in terms of volume.
The LIBOR rate quoted in the Wall Street Journal
is an average of rate quotes from five major banks. Bank of America, Barclays,
Bank of Tokyo, Deutsche Bank and Swiss Bank.
The most common quote for mortgages is the 6-month
quote. LIBOR's cost of money is a widely monitored international interest rate
indicator. Both Fannie Mae and Freddie Mac are currently using LIBOR as an index
on the loans they purchase.
LIBOR is quoted daily in the Wall Street Journal's
Money Rates and compares most closely to the 1-Year Treasury Security index.
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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.
The most common buydown is the 2-1 buydown. In the
past, for a buyer to secure a 2-1 buydown they would pay 3 points above current
market points in order to pay a below market interest rate during the first two
years of the loan. At the end of the two years they would then pay the old
market rate for the remaining term.
As an example, if the current market rate for a
conforming fixed rate loan is 8.5% at a cost of 1.5 points, the buydown gives
the borrower a first year rate of 6.50%, a second year rate of 7.50% and a third
through 30th year rate of 8.50% and the cost would be 4.5 points. Buydown were
usually paid for by a transferring company because of the high points associated
with them.
In today's market, mortgage companies have
designed variations of the old buydowns rather than charge higher points to the
buyer in the beginning they increase the note rate to cover their yields in the
later years.
As an example, if the current rate for a
conforming fixed rate loan is 8.50% at a cost of 1.5 points, the buydown would
give the buyer a first year rate of 7.25%, a second year rate of 8.25% and a
third through 30th year rate of 9.25%, or a three-quarter point higher note rate
than the current market and the cost would remain at 1.5 points.
Another common buydown is the 3-2-1 buydown, which
works much in the same ways as the 2-1 buydown, with the exception of the
starting interest rate being 3% below the note rate. Another variation is the
flex-fixed buydown programs that increase at six-month interval rather than
annual intervals.
As an example, for a flex-fixed jumbo buydown at a
cost of 1.5 points, the first six months rate would be 7.50%, the second six
months the rate would be 8.00%, the next six months rate would be 8.50%, the
next six months rate would be 9.00%, the next six months the rate would be 9.50%
and at the 37th month the rate would reach the note rate of 9.875% and would
remain there for the remainder of the term. A comparable jumbo 30-year fixed at
1.5 points would be 8.875%.
The 11th District Cost of Funds is more prevalent
in the West and the 1-Year Treasury Security is more prevalent in the East.
Buyers prefer the slowly moving 11th District Cost of Funds and investors prefer
the 1-Year Treasury Security.
The Federal Home Loan Bank of San Francisco has
published the monthly weighted average Eleventh District since August 1981.
Currently more than one half of the savings institutions loans made in
California are tied to the 11th District Cost of Funds (COF) index.
The Federal Home Loan Bank's 11th District is
comprised of saving institutions in Arizona, California and Nevada.
Few people who use and follow the 11th District
Cost of Funds understand exactly how it is calculated, what it represents, how
it moves and what factors affect it.
The predecessor to the 11th District Cost of Funds
index was the District semiannual weighted average cost of funds published for a
six-month period ending in June and December. The San Francisco Bank was the
first Federal Home Loan Bank to publish a monthly cost of funds index.
The funds used as a basis for the calculation of
the 11th District Cost of Funds index are the liabilities at the District
savings institutions: money on deposit at the institutions, money borrowed from
a Federal Home Loan Bank (known as advances) and all other money borrowed. The
interest paid on these types of funds is the cost of these funds.
The ratio of the dollar amount paid in interest
during the month to the average dollar amount of the funds for that month
constitutes the weighted average cost of funds ratio for that month.
The average cost of funds is said to be weighted
because the three kinds of funds and their costs are added together before a
ratio is computed rather than calculating averages individually for the three
sources and using a simple average of the three ratios. This gives the greatest
weight to the interest paid on deposits, and explains the delayed reaction of
the index to rising fixed-rate mortgages.
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The GPM is another alternative to the conventional
adjustable rate mortgage, and is making a comeback as borrowers and mortgage
companies seek alternatives to assist in qualify for home financing
Unlike an ARM, GPMs have a fixed note rate and
payment schedule. With a GPM the payments are usually fixed for one year at a
time. Each year for five years the payments graduate at 7.5% - 12.5% of the
previous years payment.
GPMs are available in 30 year and 15-year
amortization, and for both conforming and jumbo loans. With the graduated
payments and a fixed note rate, GPMs have scheduled negative amortization of
approximately 10% - 12% of the loan amount depending on the note rate. The
higher the note rate the larger degree of negative amortization. This compares
to the possible negative amortization of a monthly adjusting ARM of 10% of the
loan amount. Both loans give the consumer the ability to pay the additional
principal and avoid the negative amortization. In contrast, the GPM has a fixed
payment schedule so the additional principal payments reduce the term of the
loan. The ARMs additional payments avoid the negative amortization and the
payments decrease while the term of the loan remains constant.
The scheduled negative amortization on a GPM
differs depending on the amortization schedule, the note rate and the payment
increases of the loan. GPM loans with 7.5% annual payment increases offer the
lowest qualifying rate but the largest amount of negative amortization.
On a loan of $150,000, with a 30 year amortization
and a note rate of 10.50% with 12.5% annual payment increases, the negative
amortization continues for 60 months. The qualifying rate is 5.75% and the
negative amortization is 11.34% (approximately $17,010).
The note rate of a GPM is traditionally .5% to
.75% higher than the note rate of a straight fixed rate mortgage. The higher
note rate and scheduled negative amortization of the GPM makes the cost of the
mortgage more expensive to the borrower in the long run. In addition, the
borrowers monthly payment can increase by as much as 50% by the final payment
adjustment.
The lower qualifying rate of the GPM can help
borrowers maximize their purchasing power, and can be useful in a market with
rapid appreciation. In markets where appreciation is moderate, and a borrower
needs to move during the scheduled negative amortization period they could
create an unpleasant situation.
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