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Program Overview

Fixed (15Year, 30Year)
Adjustable (15Year, 30Year)
Option ARM


Fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. The term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, although ancillary costs (such as property taxes and insurance) can and do change.

Adjustable rate mortgage, the interest rate is generally fixed for a period of time(1,3,5,7years), after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Common indices include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular.


Option ARM

This loan program is an adjustable rate mortgage with added flexibility of making one of several possible payments on your mortgage every month, in order to better manage your monthly cash flow.

It's low introductory start rate allows you to make very low initial mortgage payments and low qualifying rates enable you to qualify for more home. The minimum payment option can help keep your monthly payments affordable. The minimum monthly payment is not sufficient to pay the monthly interest due, and you can always avoid deferred interest by choosing the interest-only payment option.

With the Option ARM, you generally have at least two fully amortized payment choices, leading to a quicker loan payoff. If you prefer to pay off your loan on schedule, you can make the fully amortized payment based on a 30-year loan, or you can choose the 15-year payment option for the fastest equity build-up.

In most cases, you can also make additional principal payments which reduce the amount you need to pay in later months. Option ARM loan programs are right for you if you'd like to own your property only for a short time, and prefer affordability and flexibility in your monthly payment. However, if you select the minimum payment option in the early years, you should be prepared for a possible sudden increase (often referred to as payment shock) in your monthly payments thereafter.


Option ARM loans have four major types of payment options:

• Minimum Payment
With the minimum payment option, your monthly payment is set for 12 months at your initial interest rate. After that, the payment changes annually, and a payment cap limits how much it can increase or decrease each year.

If you make the minimum payment after the end of your initial interest rate period, which usually holds only for the first 1 to 3 months, it may not be enough to pay all of the interest charged on your loan for the previous month and the unpaid interest will be added to the principal balance you owe (will be deferred).


• Interest-Only Payment
With the interest-only payment option, you can avoid deferred interest, when the minimum payment is not enough to pay the monthly interest due. The interest-only payment option, however, is not available if the interest-only payment would be less than the minimum payment. Please note, that this payment option does not result in your principal reduction.

The interest-only payment may change every month based on changes in the ARM index used to determine your fully indexed rate.


• Fully Amortizing 30-Year Payment
With fully amortizing payments, you pay both principal and interest and keep your loan on schedule. Your payment is calculated each month based on the prior month's fully indexed rate, loan balance and remaining loan term.


• Fully Amortizing 15-Year Payment
If you prefer to put your loan on an accelerated schedule and can afford higher monthly payments, the 15-year payment option allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan.



Loan Terms

Option ARM loans are available for 30 or 15 years.
Initial Interest Rate (Note Rate)
Your Minimum Payment Rate or 'Start Rate'. It may vary from 1.25% up to 3.95% and depends on your Loan-to-Value Ratio (LTV).
With hybrid option ARMs, that use a different minimum payment calculation method, your initial rate is usually higher.
Initial Interest Rate Period (Introductory Period, Initial Fixed-Rate Period)
Option ARM loans are available with an initial introductory period, usually of 1, 3 or 6 months, after which the interest rate may change.


Notes:

• Some option ARM are currently offered without any introductory period, so the fully indexed rate (FIR) is effective immediately.

• The initial Fixed-Rate Period should not be confused with Initial Fixed-Rate / Fixed-Payment Period, a typical feature of hybrid option ARMs. Fully Indexed Rate (FIR)

The sum of the margin and the most recent index figure available prior to a scheduled interest rate change date. Subject to the interest rate caps.


Interest Rate Adjustment Period
The time between interest rate adjustment dates.
With option ARMs, the adjustment period is usually set to 1 month: the fully indexed rate may not change more than once every month based on the movement of the index.

Maximum Rate (Interest Rate Ceiling)

See: Lifetime Cap.

Lifetime Cap

A lifetime cap limits the interest rate increase over the life of the loan. It protects you financially and usually is expressed as maximum rate. Lifetime caps may vary from 9%-10% up to 19%.

Lifetime Floor (Life Floor, Lifetime Rate Floor)
The lifetime floor is never lower than the margin. See: Margin.

Minimum Payment
Initially (for the first 12 months), the minimum payment is calculated using the start rate, the amount you borrow and the loan term. Thereafter, it is recalculated annually.

Minimum Payment Adjustment Period
The minimum payment adjustment period is usually set to 12 months, unless negative amortization limit is reached.

Minimum Payment Change Cap
A limit on how much the minimum monthly payment can change at each adjustment. With most option ARMs, your payment cap will be 7.5% of minimum payment amount in first five years. It means that on any Payment Change Date, the minimum payment cannot increase or decrease by more than 7.50% (unless the loan is recast or the negative amortization limit is reached).

Negative Amortization Cap (Balance Cap, Negative Amortization Limit, Negative Amortization Ceiling)
< It limits the loss of equity in your home when low monthly payments do not cover fully the interest rate charges agreed upon in the mortgage contract and is usually set to 110% - 125% of your original principal balance. When the negative amortization limit is reached, the minimum payment increases immediately: the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the payment cap does not apply.

Payment Recast Period
Recasting (or re-calculating your loan) is another way of limiting negative amortization and keeping your loan on the original schedule. The main purpose of recasting is ensure the loan is paid off within the scheduled amortization period.

Option ARM loans are usually recast every five or ten years (or sooner, if the negative amortization limit is reached). This re-calculation (or re-amortization) is based on the outstanding principal balance, the remaining term and the fully indexed rate.

When the loan is recast, the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the payment cap does not apply (the payment cup, however, will go back into effect immediately after the recast, and will hold until the next time your loan is recast).


Index Options

Your interest rate is usually based on one of the following indexes:
    • Monthly Treasury Average (MTA)
    • Cost of Savings Index (COSI)
    • London InterBank Offered Rate (LIBOR)
    • 11th District Cost Of Funds Index (COFI)
These indexes change once a month.


Margin
The number of percentage points (for example, 2.75) the lender adds to the index rate to calculate the ARM interest rate at each adjustment. The margin is set in the mortgage contract, remains fixed for the term of the loan and is not impacted by the financial markets and movement of interest rates.

Caps
Option ARMs don't have First Interest Change Cap or Periodic Interest Change Cap*. Initial and periodic interest rate changes are not capped and move with the market, as long as the rate adjustments do not exceed the lifetime cap. The interest rate cannot adjust lower than the lifetime floor.

Option ARM loans have:
    • Lifetime Cap (or Maximum Rate)
    • Lifetime Floor (or Margin)
    • Payment Cap (or Minimum Payment Change Cap)
    • Balance Cap (or Negative Amortization Limit)

* This is not the case with so-called hybrid (combined) option ARMs. Hybrid option ARM loan programs usually have both First Interest Change Cap and Periodic Interest Change Cap, however, their minimum payment adjustments are not capped (i.e. there is no Payment Cap). Both hybrid and standard option ARMs have Balance Cap (a. k. a. Negative Amortization Limit).

Documentation Types
Full doc, Limited doc, Low doc, Stated Income, No Income\No Asset (NINA), Stated Income\Stated Assets (SISA). Read more about Loan Documentation Requirements. Click here for a list of documents most lenders will require in order to process your mortgage application.

Loan Program Variations / Options / Special Features

Initial Fixed Rate Period

Option ARM loans may have an initial fixed rate period between the time the loan is originated and the first interest rate change date. After the initial fixed period the loan usually converts to a monthly-adjustable option ARM. Hybrid Option ARM loan programs have either an initial fixed payment period or an initial fixed rate / fixed minimum payment period of 3 to 7 years.


40-Year Term
Some option ARM loans, for a fee (or for an increase in your rate), contain a provision permitting you to increase the term of the loan from 30 to 40 years.

Bi-Weekly Payments
Some lenders offer optional bi-weekly payment plans with option ARMs. 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.  

 

 

Loan Calculator

Inputs:
P = principal, the initial amount of the loan (ex 100000)
I = the annual interest rate (from 1 to 100 percent) (ex 7%)
L = length, the length (in years) of the loan, or at least the length over which the loan is amortized. (ex 30y)

Converters:
J = monthly interest in decimal form = I / (12 x 100)
N = number of months over which loan is amortized = L x 12
Formula:

                       J
M = P x ------------------------    or    M = P * ( J / (1 - (1 + J) ** -N))
              1 - ( 1 + J ) ^ -N




 

 

Credit Score

How is yours Credit Score Computed?

Payment History 35%
Have payments been made in a timely manner? Is there a consistent history of slow payments? Have there been charge-offs, collection activity, occurrences of foreclosure, bankruptcy, suits, liens, or repossessions?


Amounts Owed 30%
What is the total debt, debt on individual accounts, number of accounts, percent of available credit converted to debt? If credit lines or cards are exhausted, this will have a negative impact on a credit score.


Length of Credit History 15%
How long has the borrower been a creditor? An insufficient credit history or lack of credit history will have a negative impact on a credit score. FICO, in fact, will not calculate a credit score unless a credit report shows an account which has been open for six months or more and at least one account that has been updated in the previous six months.


New Credit 10%
The number of recently opened credit accounts and their proportion to total open accounts and/or the number of recent credit inquiries may be viewed as an indication of cash flow problems. However, new credit, if indicating re-establishment of a positive credit history following credit problems will have a positive impact. (Certain inquiries such as those put through by companies seeking customers for pre-approved credit card offers or those by existing creditors monitoring existing customers credit performance are not considered in the credit score.)


Types of Credit Used 10%
Too many credit card accounts, revolving retail charge accounts, or loans from certain types of lenders such as finance companies can have a negative effect on scores.

These are guidelines for the general population. Evaluation criteria for persons, for example with newly established credit, may be different.



Improving Your FICOฎ Score (source Fair Isaac)

It’s important to note that raising your score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.


Payment History Tips

• Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.

• If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.

• Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.

• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.


Amounts Owed Tips

• Keep balances low on credit cards and other “revolving credit”. High outstanding debt can affect a score. Generally, it's good to keep your balances at or below 25 percent of your credit card limit • Pay off debt rather than moving it around.

The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.

• Don't close unused credit cards as a short-term strategy to raise your score.

• Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower score.


Length of Credit History Tips

• If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user. New Credit Tips

• Do your rate shopping for a given loan within a focused period of time. FICOฎ scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

• Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your score in the long term.

• Note that it's OK to request and check your own credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.


Types of Credit Use Tips

• Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix - it probably won't raise your score.

• Have credit cards - but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.

• Note that closing an account doesn't make it go away. A closed account will still show up on your credit report, and may be considered by the score.


Check accuracy of your report

Review your reports from all three credit bureaus for accuracy once a year as well as several months before applying for a loan. Changing a mistake on your report - such as a payment that is wrongly labeled as late -- can take 30 days to three months, sometimes longer.



Program Overview

Types of loans

Option ARM
Adjustable
Fixed
   15 YEAR
   30 YEAR


Option ARM


This loan program is an adjustable rate mortgage with added flexibility of making one of several possible payments on your mortgage every month, in order to better manage your monthly cash flow.

It's low introductory start rate allows you to make very low initial mortgage payments and low qualifying rates enable you to qualify for more home. The minimum payment option can help keep your monthly payments affordable. The minimum monthly payment is not sufficient to pay the monthly interest due, and you can always avoid deferred interest by choosing the interest-only payment option.

With the Option ARM, you generally have at least two fully amortized payment choices, leading to a quicker loan payoff. If you prefer to pay off your loan on schedule, you can make the fully amortized payment based on a 30-year loan, or you can choose the 15-year payment option for the fastest equity build-up.

In most cases, you can also make additional principal payments which reduce the amount you need to pay in later months. Option ARM loan programs are right for you if you'd like to own your property only for a short time, and prefer affordability and flexibility in your monthly payment. However, if you select the minimum payment option in the early years, you should be prepared for a possible sudden increase (often referred to as payment shock) in your monthly payments thereafter.


Option ARM loans have four major types of payment options:

• Minimum Payment
With the minimum payment option, your monthly payment is set for 12 months at your initial interest rate. After that, the payment changes annually, and a payment cap limits how much it can increase or decrease each year.

If you make the minimum payment after the end of your initial interest rate period, which usually holds only for the first 1 to 3 months, it may not be enough to pay all of the interest charged on your loan for the previous month and the unpaid interest will be added to the principal balance you owe (will be deferred).


• Interest-Only Payment
With the interest-only payment option, you can avoid deferred interest, when the minimum payment is not enough to pay the monthly interest due. The interest-only payment option, however, is not available if the interest-only payment would be less than the minimum payment. Please note, that this payment option does not result in your principal reduction.

The interest-only payment may change every month based on changes in the ARM index used to determine your fully indexed rate.


• Fully Amortizing 30-Year Payment
With fully amortizing payments, you pay both principal and interest and keep your loan on schedule. Your payment is calculated each month based on the prior month's fully indexed rate, loan balance and remaining loan term.


• Fully Amortizing 15-Year Payment
If you prefer to put your loan on an accelerated schedule and can afford higher monthly payments, the 15-year payment option allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan.



Loan Term
Option ARM loans are available for 30 or 15 years.

Initial Interest Rate (Note Rate)
Your Minimum Payment Rate or 'Start Rate'. It may vary from 1.25% up to 3.95% and depends on your Loan-to-Value Ratio (LTV).
With hybrid option ARMs, that use a different minimum payment calculation method, your initial rate is usually higher.
Initial Interest Rate Period (Introductory Period, Initial Fixed-Rate Period) Option ARM loans are available with an initial introductory period, usually of 1, 3 or 6 months, after which the interest rate may change.

Notes:
• Some option ARM are currently offered without any introductory period, so the fully indexed rate (FIR) is effective immediately.
• The initial Fixed-Rate Period should not be confused with Initial Fixed-Rate / Fixed-Payment Period, a typical feature of hybrid option ARMs. Fully Indexed Rate (FIR)

The sum of the margin and the most recent index figure available prior to a scheduled interest rate change date. Subject to the interest rate caps.


Interest Rate Adjustment Period
The time between interest rate adjustment dates.
With option ARMs, the adjustment period is usually set to 1 month: the fully indexed rate may not change more than once every month based on the movement of the index.


Maximum Rate (Interest Rate Ceiling)
See: Lifetime Cap.


Lifetime Cap
A lifetime cap limits the interest rate increase over the life of the loan. It protects you financially and usually is expressed as maximum rate. Lifetime caps may vary from 9%-10% up to 19%.
Lifetime Floor (Life Floor, Lifetime Rate Floor)
The lifetime floor is never lower than the margin. See: Margin.

Minimum Payment
Initially (for the first 12 months), the minimum payment is calculated using the start rate, the amount you borrow and the loan term. Thereafter, it is recalculated annually.

Minimum Payment Adjustment Period
The minimum payment adjustment period is usually set to 12 months, unless negative amortization limit is reached.

Minimum Payment Change Cap
A limit on how much the minimum monthly payment can change at each adjustment. With most option ARMs, your payment cap will be 7.5% of minimum payment amount in first five years. It means that on any Payment Change Date, the minimum payment cannot increase or decrease by more than 7.50% (unless the loan is recast or the negative amortization limit is reached).

Negative Amortization Cap (Balance Cap, Negative Amortization Limit, Negative Amortization Ceiling)
It limits the loss of equity in your home when low monthly payments do not cover fully the interest rate charges agreed upon in the mortgage contract and is usually set to 110% - 125% of your original principal balance.
When the negative amortization limit is reached, the minimum payment increases immediately: the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the payment cap does not apply.

Payment Recast Period
Recasting (or re-calculating your loan) is another way of limiting negative amortization and keeping your loan on the original schedule. The main purpose of recasting is ensure the loan is paid off within the scheduled amortization period.
Option ARM loans are usually recast every five or ten years (or sooner, if the negative amortization limit is reached). This re-calculation (or re-amortization) is based on the outstanding principal balance, the remaining term and the fully indexed rate.
When the loan is recast, the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the payment cap does not apply (the payment cup, however, will go back into effect immediately after the recast, and will hold until the next time your loan is recast).

Index Options
Your interest rate is usually based on one of the following indexes:
• Monthly Treasury Average (MTA)
• Cost of Savings Index (COSI)
• London InterBank Offered Rate (LIBOR)
• 11th District Cost Of Funds Index (COFI)

These indexes change once a month.

Margin
The number of percentage points (for example, 2.75) the lender adds to the index rate to calculate the ARM interest rate at each adjustment. The margin is set in the mortgage contract, remains fixed for the term of the loan and is not impacted by the financial markets and movement of interest rates.

Caps
Option ARMs don't have First Interest Change Cap or Periodic Interest Change Cap*. Initial and periodic interest rate changes are not capped and move with the market, as long as the rate adjustments do not exceed the lifetime cap. The interest rate cannot adjust lower than the lifetime floor.

Option ARM loans have:
• Lifetime Cap (or Maximum Rate)
• Lifetime Floor (or Margin)
• Payment Cap (or Minimum Payment Change Cap)
• Balance Cap (or Negative Amortization Limit)

* This is not the case with so-called hybrid (combined) option ARMs. Hybrid option ARM loan programs usually have both First Interest Change Cap and Periodic Interest Change Cap, however, their minimum payment adjustments are not capped (i.e. there is no Payment Cap). Both hybrid and standard option ARMs have Balance Cap (a. k. a. Negative Amortization Limit).

Documentation Types
Full doc, Limited doc, Low doc, Stated Income, No Income\No Asset (NINA), Stated Income\Stated Assets (SISA). Read more about Loan Documentation Requirements. Click here for a list of documents most lenders will require in order to process your mortgage application.


Loan Program Variations / Options / Special Features

Initial Fixed Rate Period
Option ARM loans may have an initial fixed rate period between the time the loan is originated and the first interest rate change date. After the initial fixed period the loan usually converts to a monthly-adjustable option ARM. Hybrid Option ARM loan programs have either an initial fixed payment period or an initial fixed rate / fixed minimum payment period of 3 to 7 years.

40-Year Term
Some option ARM loans, for a fee (or for an increase in your rate), contain a provision permitting you to increase the term of the loan from 30 to 40 years.

Bi-Weekly Payments
Some lenders offer optional bi-weekly payment plans with option ARMs. 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.

Conversion Option
The interest rate or points may be somewhat higher for a convertible option ARM, and it also may require a small fee at the time of conversion.

 
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