Frequently
Asked Questions
Appraisal
Credit Rating
Home
Equity
Loan
Programs
More
about Adjustable Rate Mortgages (ARM)
Appraisal
Why
is an appraisal required?
An appraisal is an estimate
of the value of a property. An estimate of the value
of the property generally refers to its fair market
value. The purpose and use of appraisals include transfer
of ownership, financing and credit, taxation, condemnation,
insurance and many others. An appraiser is typically
a state-licensed individual trained to render expert
opinions concerning property values. Authorized by
Congress, The Appraisal Foundation sets minimum standards
for licensed appraisers. The Foundation is the parent
organization of the Appraiser Qualifications Board
(AQB). States are required to implement appraiser
certification requirements which are at least as rigorous
as those issued by the AQB.Certified General Appraiser
and Certified Residential Appraiser.
The AQB has issued criteria for the Certified General Appraiser
and Certified Residential Appraiser. Each has education, experience, examination
and continuing education requirements. Consider working with either a Certified
General or Certified Residential Appraiser. The appraiser considers three approaches
to value when arriving at an opinion: sales comparison approach (formerly the
market data comparison approach), cost approach and income capitalization approach.
When evaluating single-family, owner-occupied properties, the sales comparison
approach is most heavily weighted by an appraiser. This approach compares the
subject property with other similar properties in the vicinity which have sold
or are for sale. Real estate professionals also rely heavily on this approach.
Real estate agents approximate
the appraisal process by conducting a Comparative
Market Analysis (CMA), using the sales comparison
approach to value. The accuracy of the agent's appraisal
depends on the experience and skill of the agent.
The CMA is not an officially recognized appraisal.
Most lenders will not lend
money without an acceptable appraisal. You can be
sure you are getting an expert appraisal when the
appraiser is licensed or certified and is governed
by the Competency Provision of the Code of Ethics
of the Uniform Standards of Professional Appraisal
Practice (USPAP), proclaimed by the Appraisal Foundation.
Appraisal
Methods
Most
appraisers use three approaches to establish the
value of a property. The Sales Comparison Approach
is normally considered to be the best indication
of value for residential property.
Sales Comparison Approach:
In this approach the appraiser finds three to four
comparable properties in the neighborhood which have
recently sold. Ideally, these properties are within
a one-half mile radius of the subject property and
have sold within the last six months. The appraiser
compares the sold properties to the subject property.
The factors used in the comparison include square
footage, number of bedrooms and bathrooms, property
age, lot size, view, and property condition.
Cost approach: This approach considers the value of the land,
assumed vacant, added to the cost to reconstruct the appraised building as
new on the date of value, less the accrued depreciation the building suffers
in comparison with a new building.
Income capitalization approach: In this approach the potential
net income of the property is capitalized to arrive at a property value. This
approach is suited to income-producing properties and is usually used in conjunction
with other valuation methods. The process of converting a future income stream
into a present value is known as capitalization
How
much does an appraisal cost?
The cost
of an appraisal varies based upon the:
Type of appraisal: The most
commonly used appraisal is called the Uniform Residential
Appraisal Report (URAR). Some lenders may accept an
abbreviated appraisal called the "Drive By Appraisal",
which costs less than the URAR.
Type of property: Appraisals for single-family homes and condominiums
usually cost less than appraisals for multi-unit properties.
Value of property: Appraisals for higher-priced homes usually
cost more than appraisals for lower-priced homes. If your home value is over
$500,000, you can expect to pay more for your appraisal.
Location of property: The cost of an appraisal is affected by
geographic location and availability of appraisers. In areas where appraisers
are few, or the properties are hard to access, appraisal costs increase.
Use of property: Appraisals for income-producing properties,
for example, usually cost more than appraisals for non-income-producing properties.
Rental property appraisals include a rent survey and the property's income
statement. Appraisal fees on single-family, owner-occupied homes under $500,000
in densely populated areas vary between $250 and $400. Fees for similarly priced
rental properties may vary between $400 and $550.
Credit
Rating
Credit
Reporting Agencies
Three agencies accumulate data
on which to base your credit history. Their names,
addresses and phone numbers are shown below. It is
normally very difficult to speak to a live person
at these agencies; instead you are directed through
a voice-mail maze which will give you instructions
on how to get a copy of your report, what it may cost,
or how to deal with a problem you may have. In any
case, it is better to communicate in writing. Use
certified mail so you will get a receipt showing that
the agency received your letter and when they received
it.
EQUIFAX
P.O. Box 105873
Atlanta GA 30348
(800) 685 1111
EXPERIAN (formerly TRW)
P.O. Box 8030
Layton UT 84041-8030
(800) 520 1221
(800) 682 7654
TRANS-UNION
P.O. Box 390
Springfield PA 19064
(800) 961 8800
(800) 851 2674
Credit
Repair
You see the advertisements
in newspapers, on TV, and on the Internet. You hear
them on the radio. You get fliers in the mail. You
may even get calls from telemarketers offering credit
repair services. They all make the same claims:
"Credit problems? No problem!"
"We can erase your bad credit -- 100% guaranteed."
"Create a new credit identity legally."
"We can remove bankruptcies, judgments, liens, and bad loans from your credit
file forever!"
Do yourself a favor and save some money, too. Don't believe these
statements. Only time, effort, and a personal debt repayment plan will improve
your credit report.
This document explains how
you can improve your credit-worthiness and lists legitimate
resources for low- or no-cost help.
The Scam
Everyday, companies
nationwide appeal to consumers with
poor credit histories. They promise,
for a fee, to clean up your credit
report so you can get a car loan, a
home mortgage, insurance, or even a
job. The truth is, they can't deliver.
After you pay them hundreds or thousands
of dollars in up-front fees, these
companies do nothing to improve your
credit report; many simply vanish with
your money.
The Warning Signs
If you decide to respond to a credit repair offer, beware
of companies that:
Want you to pay for credit
repair services before any services are provided;
Do not tell you your legal rights and what you can do
yourself for free;
Recommend that you not contact a credit bureau directly;
Suggest that you try to invent a "new" credit report by applying
for an Employer Identification Number to use instead of your Social Security
Number;
Advise you to dispute all information in your credit
report or take any action that seems illegal, such as creating a new credit
identity. If you follow illegal advice and commit fraud, you may be subject
to prosecution.
If you provide false information while using the mail
or telephone to apply for credit, you could be charged and prosecuted for
mail or wire fraud. It's a federal crime to make false statements on a loan
or credit application, misrepresent your Social Security Number, or obtain
an Employer Identification Number from the Internal Revenue Service under
false pretenses.
Under the Credit Repair Organizations
Act, credit repair companies cannot require you to
pay until they have completed the promised services.
The Truth
No one can legally
remove accurate and timely negative
information from a credit report. If
you wish to dispute information contained
in your credit report, the law allows
you to request a reinvestigation of
the information in question. There
is no charge for this. Everything a
credit repair clinic can do for you
legally, you can do for yourself at
little or no cost. According to the
Fair Credit Reporting Act:
You are entitled to a free
copy of your credit report if you've been denied credit,
insurance or employment within the last 60 days. If
your application for credit, insurance, or employment
is denied because of information supplied by a credit
bureau, the company you applied to must provide you
with that credit bureau's name, address, and telephone
number.
You can dispute mistakes or outdated items for free. Ask the
credit reporting agency for a dispute form or submit your dispute in writing,
along with any supporting documentation. Do not send them original documents.
Clearly identify each item in your report that you dispute, explain
why you dispute the information, and request a reinvestigation. If the new
investigation reveals an error, you may ask that a corrected version of the
report be sent to anyone who received your report within the past six months.
Job applicants can have corrected reports sent to anyone who received a report
for employment purposes during the past two years.
When the reinvestigation is
complete, the credit bureau must give you the written
results and a free copy of your report if the dispute
results in a change. If an item is changed or removed,
the credit bureau cannot put the disputed information
back in your file unless the information provider
verifies its accuracy and completeness, and the credit
bureau gives you a written notice that includes the
name, address, and phone number of the provider.
You also should tell the creditor
or other information provider in writing that you
dispute an item. Many providers specify an address
for disputes. If the provider then reports the item
to any credit bureau, it must include a notice of
your dispute. In addition, if you are correct, that
is, if the information is inaccurate, the information
provider may not use it again.
If the reinvestigation does
not resolve your dispute, have the credit bureau include
your version of the dispute in your file and in future
reports. Remember, there is no charge for a reinvestigation.
Reporting Negative Information
Accurate negative
information generally can be reported
for seven years, but there are exceptions:
Bankruptcy information can
be reported for 10 years;
Information reported because of an application for a job with
a salary of more than $75,000 has no time limitation;
Information reported because of an application for more than
$150,000 worth of credit or life insurance has no time limitation;
Information concerning a lawsuit or a judgment against you can
be reported for seven years or until the statute of limitations runs out, whichever
is longer; and
Default information concerning U.S. Government insured or guaranteed
student loans can be reported for seven years after certain guarantor actions.
The Credit Repair
Organizations Act
By law, credit
repair organizations must give you
a copy of the "Consumer Credit
File Rights Under State and Federal
Law" before you sign a contract.
They also must give you a written contract
that spells out your rights and obligations.
Read these documents before signing
the contract. The law contains specific
protections for you. For example, a
credit repair company cannot:
make false claims about their
services;
charge you until they have completed the promised services;
perform any services until they have your signature on a written
contract and have completed a three-day waiting period. During this time, you
can cancel the contract without paying any fees.
Your contract must specify:
the payment terms for services,
including their total cost;
a detailed description of the services to be performed;
how long it will take to achieve the results;
any guarantees they offer;
the company's name and business address.
Have You Been Victimized?
Many states have laws strictly regulating credit repair companies.
States may be helpful if you've lost money to credit repair scams.
If you've had a problem with
a credit repair company, don't be embarrassed to report
them. While you may fear that contacting the government
will only make your problems worse, that's not true.
Laws are in place to protect you. Contact your local
consumer affairs office or your state attorney general
(AG). Many AGs have toll-free consumer hotlines. Check
with your local directory assistance.
For More Information
You can file a complaint with
the FTC by contacting the Consumer Response Center
by phone: toll-free 1-877-FTC-HELP (382-4357); TDD:
202-326-2502; by mail: Consumer Response Center, Federal
Trade Commission, 600 Pennsylvania Ave, NW, Washington,
DC 20580; or through the Internet, using the online
complaint form. Although the Commission cannot resolve
individual problems for consumers, it can act against
a company if it sees a pattern of possible law violations.
This document was written in February 1998 by the FTC.
Home
Equity
Types
of Home Equity loans
Fundamentally, there are two
types of home equity loans:
Home Equity Line: When you
get a home equity line, you obtain the right to draw
money, whenever you want, over a certain period of
time. You only pay interest on the amount you borrow.
You may borrow, pay off and borrow again against the
line of credit. You typically access the line with
a check or credit card.
Second Mortgage (home equity loan): When you get a second mortgage,
you obtain a lump sum of money. The interest rate and monthly payments are
fixed.
Before deciding which type of loan you want, consider how you'll
use the money. If you need funds for a single expense, such as a room addition,
remodeling, etc., you'll want to strongly consider a fixed-rate, second mortgage.
You receive one lump sum at the beginning of the loan term. You pay it back
in equal, monthly installments.
The certainty of a fixed interest
rate and equal monthly payments make the fixed-rate,
second loan very attractive. Will this type of loan
be less expensive compared to an adjustable rate,
home equity line? There is no way to know with certainty.
One would have to be able to predict interest rates
with accuracy. Consider one of the reasons why adjustable
rate loans were invented: to shift interest rate risk
from the lender to the borrower. When market interest
rates rise above the interest rate on your fixed-rate
mortgage, the lender is effectively losing money on
your mortgage and you're getting a bargain. Lenders
wanted a way to protect themselves from this situation--thus
the adjustable-rate mortgage.
If you need periodic amounts
of money over time, for a child's education tuition,
for example, a home equity line may be ideal. You
can borrow only the amount you need, when you need
it. These loans carry adjustable (ARM) rates, but
some banks allow you to convert a portion of your
loan to a fixed-rate second. You may pay a premium
for the convenience of an equity line, including a
transaction fee for each draw and an annual fee if
you draw or not.
Deciding in advance which type
of loan is best for you helps when comparing the expense
of various loans. Since the APR for a fixed-rate second
is calculated differently compared to a home equity
line, APR comparisons can be difficult when comparing
a fixed-rate second to a home equity line. APRs of
fixed-rate seconds account for points and other closing
charges. APRs for home equity lines don't account
for points and other closing costs. When comparing
the same types of loans (apples to apples), APRs are
much more meaningful.
Shopping
for a Home Equity line of credit
Is a home equity line what
you need?
Before you apply for a home
equity line of credit (HELOC), make sure it's the
type of loan you want. If you need relatively small
amounts of money over time, such as for school tuition,
a HELOC may be right for you. If you need a lump sum
for a particular purpose, such as building a room
addition, a home equity loan would probably be better.
Carefully compare plans
Carefully compare several plans.
Examine terms and conditions, annual percentage rates
(APR), annual and initial transaction (set up) costs,
indices, margins and caps. Some lenders may not charge
setup or annual fees, but may charge a higher interest
rate in return.
There may be an introductory,
or "teaser" rate offered. This is a temporary
rate which will have little beneficial value over
the life of your loan. Since most HELOCs are variable
rate loans, the rate you pay is the sum of the index
plus the margin. Indices are expressed as rates and
include Prime and T-Bill rates. The margin is explicitly
stated in your loan documents and is also expressed
as a percentage. For example, if your loan were tied
to the Prime rate with a 2% margin, and the Prime
rate were 8%, you'd pay 10%. Historical information
regarding the behavior of various indices is available
on-line and at your local library. A little research
will help you determine which index you'd be most
comfortable with.
Your variable rate plan will
identify a maximum interest rate (ceiling or cap).
Your loan may not exceed the rate cap during the life
of the loan under any conditions.
Consider a loan which allows
amortization--repayment in installments of principal
and interest sufficient to retire the debt by the
end of the plan. Try to amortize your loan, otherwise,
you may incur a balloon payment at the end of the
plan.
Negative Amortization
Under certain circumstances,
depending on your program, the monthly payments may
not adjust adequately to fully account for interest
rate increases. In this event, negative amortization
may occur. Negative amortization is when in which
your loan balance increases. If this condition is
a possibility with your loan, discuss with your lender
how you can avoid it.
Some lenders may permit you
to convert a variable rate to a fixed rate during
the life of the plan, or to convert all or a portion
of your line to a fixed-term installment loan.
Agreements generally will permit
the lender to freeze or reduce your credit line under
certain circumstances. For example, some variable-rate
plans may not allow you to get additional funds during
any period the interest rate reaches the cap.
Borrow Wisely
Perhaps you discover you can
borrow much more than you expected, or need. A HELOC
may seem to turn your home into a new type of credit
card. If you default on a credit card, you may only
damage your credit. If you default on a HELOC, you
could lose your home.
Loan
Programs
Balloon
Mortgages
With a balloon loan, at some
point you'll be forced to pay off the loan, refinance
the loan, or exercise a conversion option to get a
new loan on or before the balloon due date. Unlike
standard fixed or adjustable loans, balloon loans
are not amortized. The entire loan balance is all
due and payable in a relatively short time.
One of the most popular balloon
programs is the 30/5, commonly referred to as a "thirty-year
due in five." The interest rate is fixed and
the monthly payment is sufficient to pay off the loan
in thirty years, but the outstanding principal balance
is due at the end of five years. Some 30/5s have a
conversion option which allows you to convert to a
twenty-five year, fixed rate at the time the balloon
becomes due. There may be a minimal processing fee
(typically $250) to convert to the new loan. The conversion
rate is normally the FNMA sixty-day rate plus .5 percent.
The conversion option may also be conditioned upon:
Satisfactory mortgage-payment
history. If your payments were late, the conversion
may be denied.
If the loan was secured by an owner-occupied dwelling, the dwelling
will still need to be owner-occupied. If the house is a rental at the time
of loan-conversion, the conversion may be denied, or you might be charged a
higher interest rate.
Secondary financing may not be allowed. If you have a second
mortgage, the conversion may be denied unless you pay off the second mortgage.
Terms vary by lender. More information can be found in the loan
obligation (promissory note). This is a document the lender will require you
to sign at the time of closing.
Another popular balloon loan
program is the 30/7. This is similar to the 30/5 except
that the balloon comes due at the end of the seventh
year.
Bi-Weekly
Payments
Making bi-weekly (ocurring
once every two weeks) payments can shorten the life
of your mortgage and reduce your interest expense
over the life of the loan. Instead of making a full
payment every month, you make a half payment every
two weeks. Since there are fifty-two weeks in a year,
you make twenty-six half payments, or thirteen full
payments. As a result, you are making one extra mortgage
payment per year. Making bi-weekly payments can reduce
the term on a thirty-year, fixed loan to approximately
twenty-two years.
There are several ways to implement
a biweekly program:
Contact your lender. See if
they offer a bi-weekly program.
Locate a company that helps borrowers make bi-weekly payments.
The company will deduct payments from your bank account every two weeks, but
will only pay your lender once per month. The disadvantage is that you loose
interest on your money that you otherwise would have made. The advantage is
that it is convenient and automatic. Be sure to fully investigate the company's
credentials. There have been scams reported in the industry.
Do it yourself. Open a bank account and make bi-weekly deposits.
Each month, pay your lender from that account. You will earn interest on the
money in your account.
Make monthly pre-payments. Increase the amount you pay each month
by one-twelfth (8.33%). By increasing your mortgage payment by just over 8
percent, you shorten the life of your loan and save money effectively the same
as you would with a bi-weekly loan.
Ask yourself some questions before committing in writing to a
bi-weekly program. Remember, any loan is potentially a bi-weekly loan. If you
have the discipline to make the extra payment per month or per year, why enter
into a written agreement or pay someone to help you? If you use a third party
to help you, ask what their set-up and monthly servicing fees are, then determine
what you're really saving.
Interest
Rate Buydowns (Points)
Interest rate buydowns are
used to help you qualify for a larger loan and obtain
a higher priced home. Buydowns allow you to pay extra
points up-front in return for a lower interest rate
for the first few years. Since the additional points
you pay are tax deductible, there are some tax benefits.
People relocating due to employment often obtain buydowns.
Employers sometimes pay the extra points as part of
a relocation package.
The most common buydown program
is the 2-1 buydown. With this program the interest
rate is reduced 2 percent during the first year and
1 percent the second year. For example, if you obtain
a 2-1 buydown on a 30-year, fixed, 8 percent mortgage,
the rate is 6 percent the first year, 7 percent the
second year and 8 percent thereafter.
Some companies offer a 3-2-1
buydown. This reduces your rate 3 percent the first
year, 2 percent the second year and 1 percent the
third year.
There are many variations of
buydown programs. Some buydown programs result in
interest rates changing every six months as opposed
to every year.
FHA Loans
An FHA loan is a mortgage loan
insured by the Federal Housing Administration . FHA
is part of the U.S. Department of Housing and Urban
Development (HUD). FHA insures loans made by banks,
savings and loans, mortgage companies, credit unions
and other approved institutions. FHA does not originate
loans. Since 1934, FHA has offered mortgage insurance
programs which help people purchase homes with a modest
down payment. Title II, Section 203(b) is the most
often used single family program. Under this program
a borrower may obtain a ten, fifteen, twenty, twenty-five
or thirty year loan to purchase an existing one- to
four-family home in a rural or urban area.
In recent years, Fannie Mae
and Freddie Mac have introduced low down-payment programs
also--the Community Home Buyer program for example.
Consequently, FHA loans are less popular than they
once were. The loan limits for FHA loans vary geographically.
FHA requires a mortgage insurance
premium (MIP) when insuring a loan. Currently, the
up-front MIP is 2.25 percent of the base loan amount,
or 1.75 percent for a qualified first-time homebuyer.
The up-front MIP may be financed. In addition, there
is a monthly MIP payment which is calculated by multiplying
the loan amount by .5 percent and dividing by twelve.
Condominiums do not require up-front MIP--only monthly
MIP.
Down Payment Gifts: One of
the key benefits of an FHA program is that you do
not have to use your own funds for the down payment.
Under certain conditions, gifts are allowed if the
donor is a relative, a close friend, an employer,
or a humanitarian, welfare, or charitable organization.
A gift letter, signed by the donor, is required stating
the amount given and specifying that no repayment
is expected, (See HUD Handbook 4000.2 REV-2)
Bridal Registry: The Bridal
Registry Account allows couples who are getting married
to open a bridal registry savings account with a participating
Federal Housing Administration approved bank. Family
and friends may deposit cash wedding gifts directly
into the interest-bearing account.
FHA Streamline Refinance: FHA
has made it very easy for borrowers to refinance their
existing FHA loans. If your mortgage is currently
FHA insured, your payments have not been late, you
are not taking cash out, and you are reducing your
payment--you may qualify for the FHA Streamline Refinance
Program. An FHA Streamline Refinance typically does
not require an appraisal
203(k) loan: FHA insures rehabilitation
loans for owner-occupants, municipalities and non-profit
housing providers to finance 1) rehabilitation of
an existing property, 2) rehabilitation and refinancing
of a property, and 3) the purchase and rehabilitation
of a property.
Investors must have a 15 percent
down payment and can purchase (or refinance) and rehabilitate
properties for rental purposes or sell the property
(and get their profit using the Escrow Commitment
Procedure) to a qualified Homebuyer (who assumes the
loan).
203(k) can be used with one-
to four-family dwellings, condominiums and HUD homes
that require a minimum of $5,000 in repairs. CO-OPS
ARE NOT ELIGIBLE. Garden apartment style row housing
can be converted with 203(k) to fee simple or condominium
with the addition of fire walls every four units.
203(k) loans can be used to bring illegal dwellings
into code compliance.
Mixed use residential property
is acceptable provided the property has no greater
than 25 percent for a one story building; 33 percent
for a three story building; and 49 percent for a two
story building of its floor area used for commercial
(storefront) purposes. The rehabilitation funds can
only be used for the residential functions of the
dwelling and areas used to access the residential
part of the property.
Reverse mortgages for seniors:
Homeowners sixty-two and older who have paid off their
mortgages or have only small mortgage balances remaining
are eligible to participate in HUD's reverse mortgage
program. The program allows homeowners to borrow against
the equity in their homes.
Homeowners can receive payments
in a lump sum, on a monthly basis, or on an occasional
basis similar to a line of credit. Under certain circumstances,
homeowners may restructure their payment options.
Unlike ordinary home equity
loans, a HUD reverse mortgage does not require repayment
as long as the borrower lives in the home. The reverse
mortgage is repaid in one payment, after the death
of the borrower, or when the borrower no longer occupies
the property as a principal residence. Upon sale of
the home, any remaining equity goes to the homeowner
or to his or her survivors. If the sales proceeds
are insufficient to pay the amount owed, HUD will
pay the lending institution the amount of the shortfall.
The maximum amount of the reverse
mortgage is determined by multiplying the maximum
claim amount by the factor corresponding to the age
of the youngest borrower and the expected rate. It
is beyond the scope of this document to present the
factorial tables required to calculate your particular
maximum loan amount.
Home Improvement FHA Title
1 loans: Under Title I, FHA insures loans obtained
for repairs, alterations, and improvements to existing
structures, and for the building of small new structures
for nonresidential use. The property can be non-residential,
multi-family, or single-family. Interest rates on
these loans are set by HUD-approved lenders.
For answers to your FHA questions,
call 1-800-CALLFHA.
Fixed-Rate
Mortgages
Fixed-rate
mortgages are very popular because the interest rate
and monthly payments are constant. Fixed loans are
generally amortized over ten, fifteen, twenty or
thirty years.
A fixed-rate mortgage is generally
preferred when the interest rate is relatively low
and one intends to keep the property for more than
five to seven years. When rates are relatively high,
or if one intends to sell the property in fewer than
five to seven years, adjustable loans are generally
preferred.
The most common fixed rate
mortgage is the thirty-year fixed. Borrowers who want
to pay off their loan sooner may opt for a fifteen-year
mortgage. If you are trying to decide between a thirty-year
and a fifteen-year loan, consider the following:
Paying your loan over fifteen
years can save you thousands of dollars in interest.
Paying less interest results in less of a tax deduction.
Determine in advance if a larger tax deduction (with
a thirty-year loan) will offset the benefits derived
from paying less interest (with a fifteen-year loan).
The payment on a thirty-year loan can be substantially less than
the payment on a fifteen-year loan of the same amount. You could obtain a thirty-year
loan and invest the difference in mutual funds, stocks, CDs, etc. If you could
earn a higher, after-tax rate on your investment than the rate you pay on your
mortgage, it may be advantageous to invest the difference.
The final decision you make will depend on your preferences.
If your goal is to live debt free, then a fifteen year mortgage may be right
for you. If you goal is to maximize your tax deductions, a thirty year loan
may be best for you.
ARMS
The
most popular intermediate ARM loans are the 3/1,
5/1, 7/1 and 10/1. These loans are normally amortized
over thirty years with the interest rate initially
fixed for three, five, seven and ten years respectively.
After the initial fixed period, these loans typically
adjust annually.
Intermediate ARMs are very
popular with borrowers who want the stability of a
fixed rate and the benefit of a lower introductory
rate. If you plan to sell or refinance your home in
three to ten years, you may want to consider an intermediate
ARM loan rather than a fixed-rate mortgage. You can
save money with the lower introductory rate, but you
risk having a higher rate if you are still in your
home when the introductory rate period expires and
the rate starts adjusting toward market levels.
Loan
programs with less than perfect credit
Are
there loan programs available for borrowers with
less than perfect to extremely poor credit? Absolutely.
Fundamentally, all the lender wants to be assured
of is that 1) one has the ability, and 2) the desire
to repay the debt. The worse one's credit, the more
evidence of one and two one will need to muster.
If you think you may be "credit
challenged", one of the first things you'll want
to know is, just how "less than perfect" is
your credit? Fortunately, many bright people have
dedicated their professional lives to creating methods
for answering such questions. Statistical models which
balance numerous credit factors provide methods for
determining credit ratings. The models generate a
single number—a credit, or FICO score—which
provides lenders with a starting point for making
decisions about lending money.
How do you get your credit
score? Currently there is no law requiring that consumers
be given their credit scores. Lenders aren't required
to give you your credit score—but some will
if you ask them. The lender should, however, tell
you what factors contributed to your credit score
if your score was a factor in delaying or denying
your loan application. Credit bureaus don't include
credit scores on consumer credit reports.
Assuming you know your credit
score—what does it mean? Credit scores fall
between approximately 375 to 900. Anything over 670
is considered good credit. Borrowers with good credit
are able to get the best financing rates and terms
available to the general public.
Lenders classify borrowers
into the following credit categories based upon their
credit scores. These categories can vary slightly
among lenders. For example, a credit score of 620
could be a "B" with one lender, but a "C" with
a different lender. The lower your score, the more
expensive and restrictive your potential financing
choices.
Credit
Rating Credit
Score
A+ 670
A- 660
B 620
C 580
D 550
E 520
It would be confusing at best
to present general underwriting guidelines in an attempt
to interpret credit ratings and scores as they relate
to individual borrowers. In A- through E credit scenarios,
dozens of factors are considered in the decision-making
process. Your best assurance of getting the best possible
loan is to shop
among several lenders.
More
About Adjustable Rate Mortgages
(ARM)
An ARM is a loan which allows
for the adjustment of its interest rate according
to the terms of the note and as market interest rates
change. The ARM interest rate is based upon one of
many indices which reflect market interest rates.
The borrower assumes the risk that interest rates
(and their monthly payment) will rise. By assuming
this risk, lenders may charge a lower initial interest
rate compared to fixed rate loans. The lower initial
rate is the main reason borrowers choose ARM loans--it
allows them to qualify for a larger loan and obtain
a higher-priced home.
Borrowers considering an ARM
should familiarize themselves with standard ARM features.
These features include:
Start rate (Teaser rate): This
temporary rate is the starting interest rate. It is
often referred to as the teaser rate. The start rate
is lower than the fully-indexed rate (sum of the index
plus the margin), and lower than the market rate on
fixed loans.
Initial Adjustment Period: The length of time the interest rate
is fixed initially. For example, if the initial adjustment period were six
months, the interest rate would remain fixed for the first six months. Beginning
in month seven, the loan would adjust at regular intervals.
Regular Adjustment Period: The frequency at which the interest
rate adjusts. If the regular adjustment period were six months, the interest
rate would adjust every six months.
First Adjustment Cap: The maximum amount the interest rate can
increase when it adjusts for the first time. For example, if your teaser rate
and first adjustment cap were 5 percent and 3 percent respectively, the maximum
your rate could increase after the initial adjustment period would be 8 percent.
Regular Adjustment Cap: The maximum the interest rate can adjust
up or down each adjustment period.
Lifetime Cap: The maximum interest rate allowed over the life
of the loan.
Index: The variable index referenced in your note. The margin
is added to the index to set the ARM interest rate. The index can usually be
found in business newspapers. More information about various indices is available
below.
Margin: A fixed number which is added to the index to arrive
at the ARM rate.
Fully-indexed rate: The fully-indexed rate is equal to the index
plus the margin. Your loan always adjusts toward this rate.
Conversion Options: Some ARMs have an option which allows the
borrower to convert the ARM to a fixed-rate loan. Exercising the option usually
must ocurr within a predetermined time frame; the fixed rate is determined
by a formula. For example, a one-year T-bill ARM may be converted to a fixed-rate
loan during the first five years on the adjustment date. I.e., you could convert
during the thirteenth, twenty-fifth, thirty-seventh, forty-ninth or sixty-first
month.
Computing the fully-indexed mortgage rate:
The formula to calculate the
fully-indexed interest rate is:
fully-indexed rate = value
of index + margin
Note: The rate you pay after one or more adjustments may not
be the fully-indexed rate. This can ocurr when the interest rate adjustments
are limited by a cap.
Popular ARM programs. Some of
the more popular ARM programs include:
One-Year Treasury Bill ARM
Adjusts annually
with a two percent annual cap.
Six-Month Certificate of Deposit (CD)
ARM
Adjusts every six months with with an
adjustment cap of 1 percent. The CD rate is very volatile
and changes quickly with the market.
Six-Month Treasury Average ARM
This index is relatively stable because
it averages the treasury rate over the previous six months.
This loan has a maximum interest rate adjustment of 1 percent
every six months.
Twelve-Month Treasury Average ARM
This index is relatively stable because
it averages the treasury rate over the previous twelve months.
This loan has a maximum interest rate adjustment of 2 percent
every twelve months.
Three-month COFI ARM
The COFI is one of the most stable indices
and adjusts very slowly. The three-month COFI ARM typically
has a very low start-rate for the first three months, after
which time the interest is fully indexed and adjusts monthly.
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