Mortgage Loan Products – Part II

Mortgage Loan Products Part II

Last week, I discussed how in today’s mortgage industry there are many different loan products to choose from, and how understanding these products can be vital for particular circumstance within the current economic environment.  I am going to continue my discussion and cover Graduated Payment Mortgages (GPM) as well as the popular Adjustable Rate Mortgages (ARM).   

loan products property guidingGraduated Payment Mortgage (GPM):

With a GPM, the consumer gets a fixed interest rate mortgage with different payment rates within the first five years.  For example, the first year of Principal and Interest payment could be $1,000 per month, the second year P & I payment could be $1,075 per month, third year $1,155 per month, etc.  It is important to note, this product is best suited for people who expect their income to increase in the future because the first couple years, the payment does not even cover the current interest owed and results in a negative amortization.

Adjustable Rate Mortgage (ARM):

Adjustable Rate Mortgages have become very popular over the years.  It is important to note that not all ARM’s are created equal.  Understanding the mechanics behind an ARM is crucial.  They are as follows:

Start Rate:  Equals the note rate.

Index:  The variable portion of the interest rate.  It determines the frequency of the rate adjustments.

Margin:  The fixed portion of the interest rate, which is determined by the lender.  Be careful here!  This is where consumers tend to get into trouble.  Understanding the margin on an ARM is one of the most important variables.  This is added to the index to calculate the fully indexed rate.

Fully Indexed Rate:  Fully Indexed Rate = Index + Margin.  This is the rate the ARM will adjust to when it adjusts, unless the amount of that adjustment exceeds a defined cap.

Caps (3 types):  The most common caps found on an ARM are either a 2/2/6 or a 5/2/5.  The first number represents the Initial Cap (first adjustment), the second number represents the Periodic Cap (subsequent adjustments) and the third number is the Lifetime Cap.

The first digit with the CAPS (2/2/6), is how much the interest rate can adjust at the first adjustment point.   So, if you have a 5/1 ARM, with 2/2/6 CAPs, your rate may adjust up or down no more than 2% at the first adjustment date.   If you have 5/2/5 CAPS, the rate could adjust no more than 5% up or down.  The second digit of the CAPS (2/2/6), is how much the rate may adjust up or down after the first adjustment, every adjustment point thereafter (once a year, if you have a 5/1 ARM; every 6 months if you have a 5/6 ARM).  The third digit of the CAPS (2/2/6), is how much in addition to the start rate the rate can go up over the life of the loan; the ceiling.

So lets make sense of all this.  Let’s say you have a start rate (note rate) of 3.00%, a margin of 2.25%, and index of 2.75%, and caps of 2/2/6.  This means the current interest rate (index + margin) would be 5.00%; and could adjust no more than an additional 2.00% initial cap (first adjustment) equaling a maximum of 7.00%.  This would be the same for the periodic cap (subsequent adjustments) equaling a maximum interest rate of 9.00%.  Since the lifetime cap is 6% and the note rate is 3.00%, the highest possible interest rate has already been obtained.  Therefore, the interest rate could not adjust beyond 9.00%.

Not sure who to call or where to start? Contact me today for a 100% free no-obligation loan inquiry analysis.

Matt Pell,  Loan Officer
Mortgage Warehouse, LLC
(239) 672-8502 – Direct Line
(239) 344-9223 – Fax
Company NMLS ID – 137154
Individual NMLS ID – 1018529
Better Business Bureau Rating = A+

Posted on August 26, 2013, in Finance and tagged , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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