Some Highlights: Source: https://www.keepingcurrentmatters.com/2018/05/11/3-tips-for-making-your-dream-of-owning-a-home-a-reality-infographic/
Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan’s term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called “caps”. Suppose you had a “3/1 ARM” with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%. Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.
Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7, or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years. The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that’s fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having a period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes. Homeowners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to live long in their homes. By getting a lower rate and lower monthly payments than with a 30- or 15-year loan, they can break even more quickly on refinancing costs, such as title insurance and the appraisal fee. Since the monthly payment will be lower, borrowers can make extra payments and pay off the loan early, saving thousands during the years they have the loan.
VA home loans are a critical resource for military members seeking to achieve homeownership. These mortgage loans are guaranteed by the Department of Veterans Affairs (VA), making them a unique and advantageous option for eligible veterans, active-duty service members, and surviving spouses. The primary purpose of the VA loan program is to facilitate the home buying process for those who have served or are currently serving in the military, offering them a pathway to secure and stable housing. One of the key benefits of VA home loans is the absence of a down payment requirement. Unlike conventional loans that typically necessitate a significant upfront payment, VA loans allow qualified buyers to finance 100% of the home’s value. This can be especially beneficial for military members who may not have substantial savings due to frequent relocations and other service-related financial challenges. Another significant advantage of VA home loans is the competitive interest rates they offer. Because these loans are backed by the federal government, lenders can offer lower rates compared to conventional mortgages. This can result in substantial savings over the life of the loan, making homeownership more affordable for military families. Additionally, VA home loans do not require private mortgage insurance (PMI). In conventional loans, PMI is typically required when the down payment is less than 20% of the home’s value. The elimination of this cost further reduces the monthly mortgage payments for VA loan recipients. Moreover, the VA loan program provides flexibility and support through its forgiving credit requirements. Military members who may have faced financial difficulties can still qualify for a VA loan, as the program is designed to accommodate the unique financial circumstances of military life. Overall, VA home loans offer a range of benefits that make homeownership more accessible and affordable for military members. By understanding these advantages, eligible individuals can make informed decisions about utilizing this valuable resource to achieve their homeownership goals. Eligibility Requirements for VA Home Loans VA home loans provide a unique opportunity for military members and their families to achieve homeownership. However, to benefit from this program, specific eligibility criteria must be met. These requirements ensure that the benefits are reserved for those who have served their country and their surviving spouses. Firstly, active duty service members, veterans, and National Guard or Reserve members must meet the length of service requirements. For those who served during wartime, a minimum of 90 consecutive days of active service is required. This criterion ensures that individuals who served during critical periods are recognized for their contributions. Conversely, those who served during peacetime must have completed at least 181 days of continuous active duty. This difference acknowledges the varying demands placed on military personnel during different periods of service. Additionally, those who were discharged due to a service-related disability may qualify for a VA home loan regardless of the length of service. This provision is crucial as it supports veterans who sustained injuries or illnesses due to their service, ensuring they are not disadvantaged in their pursuit of homeownership. It highlights the commitment to providing comprehensive support to all service members, particularly those affected by their service. The program also extends benefits to surviving spouses of veterans who either died in service or from a service-related disability. This eligibility criterion is vital as it offers financial assistance and stability to families who have made the ultimate sacrifice. It recognizes the enduring impact of military service on families and provides a pathway to homeownership for those left behind. Understanding these eligibility requirements is essential for military members and their families considering a VA home loan. By meeting these criteria, they can access the benefits of a VA home loan, which include favorable terms and the potential to purchase a home without a down payment. This support is a testament to the nation’s gratitude for their service and sacrifice. Key Benefits of VA Home Loans VA home loans stand out from conventional mortgages due to their numerous advantages tailored specifically for military members and veterans. One of the most significant benefits is the absence of a down payment requirement. Unlike conventional loans, which typically demand a substantial upfront payment, VA loans allow eligible borrowers to finance 100% of the home’s value. This feature can make homeownership more accessible, especially for those who might struggle to save for a down payment. Another notable advantage is the elimination of mortgage insurance. Conventional loans often require private mortgage insurance (PMI) if the down payment is less than 20% of the home’s value. VA loans, however, do not impose this additional cost, which can lead to considerable savings over the life of the loan. This absence of PMI enhances the affordability of VA home loans. VA home loans also have lenient credit requirements compared to conventional mortgages. While a good credit score is always beneficial, the VA program is designed to help those who might have faced financial challenges. This leniency can make it easier for military members to qualify for a loan and secure favorable terms. Furthermore, VA home loans typically offer lower interest rates. The Department of Veterans Affairs backs these loans, reducing the risk for lenders and, in turn, enabling them to offer competitive rates. Lower interest rates can significantly reduce monthly mortgage payments and the overall cost of the loan. Limits on closing costs are another crucial benefit of VA home loans. The VA places caps on certain fees, ensuring that borrowers are not overcharged during the loan process. This regulation provides financial protection and further reduces the upfront costs associated with purchasing a home. Lastly, VA home loans come with the unique benefit of being assumable. This means that if the home is sold, the new buyer can take over the existing loan, provided they meet the VA’s eligibility requirements. This feature can be particularly advantageous in a rising interest rate environment, as it allows the buyer to assume the current, potentially lower rate. Overall, the key benefits of VA home loans make them an
A mortgage is called “Interest Only” when its monthly payment does not include the repayment of the principal for a certain period of time. Interest Only MORTGAGES are offered on fixed-rate or adjustable-rate mortgages as well as on option ARMs. At the end of the interest-only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortized from the beginning. The longer the interest-only period, the larger the new payment will be when the interest-only period ends. You won’t build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford. Since you’ll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership. As an example, if you borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest-only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time. Mortgages with interest-only payment options may save you money in the short run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term. Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest only. In this case, the borrower can pay interest only during lean times and use bonuses or income spurts to pay down the principal.
To understand an ARM, (ADJUSTABLE RATE mortgage) you must have a working knowledge of its components. Those components are: Index: A financial indicator that rises and falls, based primarily on economic fluctuations. It is usually an indicator and is therefore the basis of all future interest adjustments on the loan. Mortgage lenders currently use a variety of indexes. Margin: A lender’s loan cost plus profit. The margin is added to the index to determine the interest rate because the index is the cost of funds and the margin is the lender’s cost of doing business plus profit. Initial Interest: The rate during the initial period of the loan, which is sometimes lower than the note rate. This initial interest may be a teaser rate, an unusually low rate to entice buyers and allow them to more readily qualify for the loan. Note Rate: The actual interest rate charged for a particular loan program. Adjustment Period: The interval at which the interest is scheduled to change during the life of the loan (e.g. annually). Interest Rate Caps: Limit placed on the up-and-down movement of the interest rate, specified per period adjustment and lifetime adjustment (e.g. a cap of 2 and 6 means 2% interest increase maximum per adjustment with a 6% interest increase maximum over the life of the loan). Negative Amortization: This occurs when a payment is insufficient to cover the interest on a loan. The shortfall amount is added back onto the principal balance. Convertibility: The option to change from an ARM to a fixed-rate loan. A conversion fee may be charged. Carryover: Interest rate increases in excess of the amount allowed by the caps that can be applied at later interest rate adjustments (a component that most newer ARMs are deleting).