Mortgage Loan Basics: Interest Only Loans, Pay Option ARM
To understand loans and mortgages we need to understand loan limits first. If your loan amount exceeds the amount below, you will qualify for a Jumbo Loan, which carries higher interest rate. One-Family (single family homes) $417,000 Two-Family(duplex) $533,850 Three-Family (triplex) $645,300 Four-Family(fourplex) $801,950 FIXED Loans: 30 Year Fixed Mortgage Rates This loan program is fixed for 30 years. Your interest rate will not change for 30 years. This is ideal for people who plan to stay at their present property for a long period of time. 20 Year Fixed Mortgage Rates Fixed for 20 years.
Your payment will be higher than 30 year fixed loan becuase your loan term is only for 20 years. Interest rate will not change for 20 years. 15 Year Fixed Mortgage Rates 15 year fixed loan has a loan term of 15 years and will not change during this period. Your monthly payment on this loan program will be much higher than 20 years fixed or 30 years fixed. Use this loan program if you plan to sell your home in 5-8 years.
Interest rate will not change for 15 years. ARM (Adjustable Rate Mortgage) ARM Loans are fixed for a certain period of time, where after that period ARM loan becomes an adjustable loan. How do they work? Each ARM Loan Program has these options: 1) Index: Most comon index-LIBOR 2) Margin: Is given to you by your lender, and it is the difference between the index rate and the interest charged to the borrower For example 5/1 ARM. This loan is fixed for 5 years after which in 6th year it becomes an adjustable loan. Your loan officer will tell you what your index is and what your margin is. Usually 5/1 arm is tied to 1-year treasury index and margin is around 2.00%-3.00% Your index + margin = Fully Index rate . Your new note rate (interest rate) after 5th year. What about the 6th year? What would your payment be? Let's say that your loan officer told you that your margin is 2.
5% with 1 year treasury index. You will have to look up 1 year treasury index for a specific month. 1 year treasury as of Oct.2005 is 4.18, and you know that your margin is 2. Therefore you new interest rate is 1 year treasury 4.18% (index) + 2.5% (margin) = 6.68% for the begining of 6th year.
Index rate are move on monthly basis, therefore your payment may flunctuate each month. In most cases banks wills end you a statement advising you that your rate will change. 3) To protect consumers from high index rates, lenders implemented a CAPS. An example of this is a 2/6 cap, which allows the interest rate on your ARM loan to go up or down by no more than two percent every adjustment period, and has a total limit of six percent for cumulative changes. Therefore a 2/6 cap on a 5% ARM will allow a maximum rate (6 + 5%) of no more than 11%. In some cases you will see 2/2/6, which means 2% adjustment with 2 year prepayment penalty and total of six percent of cumulative changes. 4) With an arm you can have either a fixed rate or you can choose an Interest Only structure loan. 1/1 ARM Mortgage Rates 1 year ARM (Adjustable Rate Mortgage) is fixed for 1 year and in 2nd year it becomes an adjustable. 3/1 ARM Mortgage Rates 3 year ARM (Adjustable Rate Mortgage) is fixed for 3 years and in 4th year it becomes an adjustable. 5/1 ARM Mortgage Rates 5 year ARM (Adjustable Rate Mortgage) is fixed for 5 years and in 6th year it becomes an adjustable.
7/1 ARM Mortgage Rates 7 year ARM (Adjustable Rate Mortgage) is fixed for 7 years and in 8th year it becomes an adjustable. 10/1 ARM Mortgage Rates 10 year ARM (Adjustable Rate Mortgage) is fixed for 10 years and in 11th year it becomes an adjustable. Interest Only Loans For example, if a 30-year fixed-rate loan of $100,000 at 8.5% is interest only, the payment is .085/12 times $100,000, or $708. This is an example of interest only payment. Each loan payment consists of Interest and Principal. Here you will be paying an interest each month and your principal will be adding to your balance, thus increasing it.