Numerous types of loan products are available to borrowers today. They break down into two basic categories - fixed rate and adjustable rate mortgages.
Understanding Loan Products - Adjustable Rate Mortgages
Adjustable rate mortgages (ARMs) have an interest rate that increases or decreases over the life of the loan based upon the interest rate environment. Since their introduction in response to unprecedented high interest rates of the early 80's, ARM loans have developed into the most diverse group of mortgages ever created. The description provided in this handbook provides a very basic overview of some of the major components of an ARM. For a detailed discussion of the program that will best meet your needs, please give me a call. It is my belief that for most home buyers today, an ARM is the best mortgage option.
ARM loans are typically named according to their adjustment interval. For example: a "3/1 ARM" is fixed for the first three years and then becomes a one-year ARM for the remainder of the 30 year term.
ARMs with initial fixed periods are very popular because they have a lower initial interest rate than a 30-year fixed. This stability, coupled with the realization that the homeowner may not have the mortgage for longer than the short fixed period, has added to their popularity.
When considering which type of ARM to get, you need to be aware of the factors that affect this type of mortgage as described below.
Understanding Loan Products - Caps
ARMs have limits as to the amount they are allowed to adjust at each interval or change period. This is called a cap. Caps can be applied to the interest rate or the payments; this varies with the type of loan you choose.
Understanding Loan Products - Fixed Rate Mortgages
Fixed rate mortgages have been around the longest. People generally have more experience with this type of mortgage. Very simply stated, fixed rate mortgages have an interest rate and monthly payment that remain the same over the term of the loan, regardless if that term is for 10, 15, 25 or 30 years.
Understanding Loan Products - Index (ARM)
The index is the financial instrument used as the foundation for determining future rates as adjustments are made on Adjustable Rate Mortgages. There are several indexes that are used in the mortgage industry - T-Bill, LIBOR, Prime and Cost of Funds.
Understanding Loan Products - Margin (ARM)
The margin is the amount the lender adds to the index to arrive at the adjusted rate to provide a satisfactory yield for his investment on Adjustable Rate Mortgages. Margins vary and can be a key factor in selecting the right loan for you.
What's Consider For Loan Approval - The Basics
Obtaining an affordable mortgage depends not only on what you feel you can afford but, more importantly, on what a lending institution says you can afford. Before lenders will issue a commitment to lend large sums of money, they must be assured that you can afford to repay the loan and that the value of the property is sufficient collateral to guarantee repayment of the loan in case of default.
You may have already noticed there is much more to the loan process than selecting an interest rate. My sincere desire is to guide you through the process and relieve any anxiety you may be feeling. In order to be considered for a mortgage, we look at five distinct areas of your finances and the property.
What's Consider For Loan Approval - Assets
We must first determine the amount of cash that you have available for a down payment and closing costs. There are guidelines that govern the allowable sources of funds for the down payment and closing costs and documentation required verifying these funds.
What's Consider For Loan Approval - Credit
As lenders, we will look at your credit report to determine how much credit you have been extended, what types of credit are available to you, how timely the payments have been made and how much your total monthly obligations are.
What's Consider For Loan Approval - Equity
The final piece to the mortgage puzzle is the difference between the loan amount and value of the property. A property appraisal is conducted to determine value. Appraisers are licensed by the state and base their determination of value on the prevailing market.
What's Consider For Loan Approval - Liabilities
It is necessary to make sure that a borrowers' obligations don't exceed acceptable ratios for both the monthly housing payment and the total of all monthly debts. The ratios consist of a housing ratio and a total monthly debt ratio. I will discuss this later.
What's Consider For Loan Approval - Income
We need to determine how much income is available to qualify for the loan, where it is coming from, and how long it is likely to continue. All income used to qualify for the mortgage loan must be verifiable. Your gross monthly income, coupled with your monthly debt obligations, is used to determine the ratios for approval of your loan. Length, type and stability of employment are also key factors to consider.
Your Next Step to Approval - Funds to Close
Please remember that Certified Funds are required to Close!
A Cashier's Check or Wired Funds is required for your remaining funds that you bring to closing.
There could be other requirements that you may need to meet or other documents that might be requested. In addition, if you are self-employed, this process could take longer.
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