Key Components to Most Adjustable Rate Mortgages(ARM):

• Index Rate—The rate to which the interest rate on an adjustable rate loan is tied.  One of the more popular indexes used is the 1-year U.S. Treasury bill.
• Margin—The amount added to the index rate that represents the lender’s cost of doing business.
• Interest Rate Cap Per Adjustment—The maximum amount a borrower’s interest rate may increase or decrease at the time of adjustment.
• Life Cap—This is the ceiling that the note rate cannot exceed over the life of the loan.
• Amortization—A period of time in which gradual repayment of debt occurs by means of systematic payments of principle and/or interest.  At the end of the time period the balance is zero.
• Others—Convertibility option; Pre-payment option; Payment Cap option; Deferred Amortization  
  

  What Your Monthly Mortgage Payment Consists of:

• Principle balance: this represents the money you originally borrowed and are paying back over the life of the loan
• Interest on loan amount
• Real estate taxes: normally 1/12 of the most recent tax bill
• Insurance (Home Owners): normally 1/12 of the yearly policy amount
• Private Mortgage Insurance (PMI)—Some borrowers who have less than 20% down are required to pay PMI.
• Assessments (if any, condo, townhome, single family home)—Depending on the type of dwelling, you may or may not be required to pay assessments.  
  

  Mortgage Options:

• 30-year conventional fixed rate loan—Benefits include:
• Monthly payments for principle and interest remain the same over the life of the loan
• Lower monthly payments when amortized over a 30-year payment period.
• 15-year conventional fixed rate loan(also available in 10- & 20-year payment schedules)—Benefits include:
• Monthly payments of principle and interest remain the same over the life of the loan
• Substantial savings of interest over the life of the loan
• Payments are approximately 25-30% higher when amortized over a shorter period of time.
• No-Point/Zero Closing Cost loan—Benefits include:
• Less cash needed at closing.  The interest rate will usually be ½ to ¾ of a percent higher when compared to loans that have points to pay at closing.
• 7-year fixed rate balloon with a 30-year amortization—Benefits include:
  • Slightly lower rate and/or less fees than the conventional 30-year fixed rate loan
  • Payment of principle and interest remains the same over the 7-year period of time (at the end of 7 years, you will need to pay off the remaining balance with either a lump sum of cash or re-finance the remaining loan amount).
• Adjustable Rate Mortgages (ARM)—There are many options with ARMs; the most popular tends to be the 1-year ARM with a 30-year amortization schedule.  Benefits include:
  • Lower interest rate for the 1st year
  • Easier to qualify for the loan amount
  •  You can qualify for a larger loan amount
  •  A year ARM offers the ability to adjust downward at the 1 year anniversary of your loan
• Federal Housing Administration (FHA)—Benefits include:
  • Easier to qualify for loan programs than conventional financing
  • Less down payment needed  
    

  Questions to Ask Lenders:

• Based on our situation, what looks like the best program for us?  Why?
• What is the projected time for processing and closing a loan?
• If PMI (Private Mortgage Insurance) is required, when and how does it go away?
• What about your rates, terms, fees, etc—are they negotiable?
• What standard underwriting guidelines do you follow?  Are there any special underwriting guidelines?
• What is your most popular loan program?  Why?
• Who services your loan?
• 6 months to a year from now, what will make this loan look good/bad to most borrowers?
• What are your standard and special fees?
• What, if any, escrow requirements exist?
• What if rates go down during the “lock-in” period?
• Who is our contact person after application for progress reports?
• What do you need from us to get our loan approved?
• Do you have any concerns about our ability to get a quick loan approval?