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


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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.

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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

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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. These loans are  almost nonexistent these days.

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

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