Sunday, November 26, 2006

Payment Options

The primary feature which makes this loan program so flexible and customized, if you will, for each borrower is the payment options. Each monthly statement will reflect four payment options:


  1. The minimum payment (remember, you must always make at least the minimum payment),
  2. An interest only payment,
  3. A fully amortizing payment based on a 30-year term, and
  4. A fully amortizing payment based on a 15-year term.

Of course, you can really pay anything greater than the minimum payment, so the borrower has a myriad of payment possibilities. However, the four shown above will be the ones reflected on the monthly mortgage payment.

Returning to our sample loan, let's see how this works:

  • $200,000 loan amount
  • 1% start rate
  • 7.5% annual payment cap
  • MTA index
  • 2.75% margin
  • 110% neg limit

(to be continued as I have to figure out how to insert a table/spreadsheet -- Blogger Help isn't much help and you can consider me a vitural virgin at this blogging stuff)


Saturday, November 25, 2006

More Thoughts of Thanks

Xerox is sponsoring a program where you can send a free thank you note to a soldier stationed overseas. Please take a moment to click on the link and fill out the form. It will only take a minute or two of your time and it will probably make a big difference in someone's day. Thank you!

http://www.letssaythanks.com/Home1024.html

Wednesday, November 22, 2006

Thanksgiving Thoughts of Gratitude

H.U. Westermayer: The Pilgrims made seven times more graves than huts. No Americans have been more impoverished than these who, nevertheless, set aside a day of thanksgiving.

Albert Schweitzer: At times our own light goes out and is rekindled by a spark from another person. Each of us has cause to think with deep gratitude of those who have lighted the flame within us.

Eric Hoffer: The hardest arithmetic to master is that which enables us to count our blessings.

Marcel Proust: Let us be grateful to people who make us happy; they are the charming gardeners who make our souls blossom.

Have a wonderful Thanksgiving!

Tuesday, November 21, 2006

Negative Limit

The negative limit is the maximum amount of negative amortization which can accure on your loan. Limits vary per lender and can range from 110% to as high as 125%. Some lenders may base their negative limit on the loan-to-value (the loan to value is the loan amount divided by the lessor of the sales price [if a purchase transaction} or appraised value) of the loan. For example, Downey Savings will allow negative amortization to accure up to 115% if the loan-to-value is 75% or less. However, if the loan-to-value exceeds 75%, the negative limit is reduced to 110%.

Here are a few examples of how the negative limit is calculated:

Loan Amount / 110% negative limit / 115% negative limit
$200,000 $220,000 ($200,000 x 1.10) $230,000 ($200,000 x 1.15)
$350,000 $385,000 ($350,000 x 1.10) $402,500 ($350,000 x 1.15)
$600,000 $660,000 ($600,000 x 1.10) $690,000 ($690,000 x 1.15)

Of course, if the negative limit is 125%, the base loan amount would be multiplied by 1.25. The negative amortization on a $200,000 loan would be $250,000.

As you can see, as loan amounts increase, the negative amortization can be significant. Keep in mind that the higher your negative amortization limit, the longer it will take to hit the limit and possibly recast your payment (see annual payment cap post). However, the downside to that, is the higher your negative amortization, when your payment is possibly recast, the amount of increase to your payment may be significantly larger.

Shop for a loan with the least amount of negative amortization. Your payment may be recast sooner, but you will save money in the long run.

Sunday, November 19, 2006

Questions

If you are in the process of applying for a loan, whether a refinance or purchase, or are contemplating obtaining a loan in the near future, please feel free to either email or post any questions you may have regarding your transaction. I will be happy to review your pending loan and offer you my opinion regarding the interest rate, fees, terms and any other areas you would like addressed. If you have been offered a "good deal" I will certainly advise you of same; conversely, if you could do better, I will let you know that, too!

Thursday, November 16, 2006

Annual Payment Cap

The Annual Payment Cap refers to the amount your payment may increase or decrease yearly. The vast majority of Option ARM's have a 7.5% payment cap. This means the most your payment can increase or decrease is by 7.5% of the previous year's payment.

Returning to our illustration, the first year's payment is $643.28. Effective with the 13th payment, the lender attempts to recalculate the payment to achieve a fully amortizing loan subject to the payment cap. What that means is the lender projects what the principal balance will be with the 13th payment (it is necessary to estimate due to the federal requirement of the lender providing the notice of the payment adjustment 45 to 60 days prior to the effective date), uses the interest rate in effect at that time (remember, index plus margin) and attempts to re-amortize the loan over the remaining term (being 348 months left after the first year). However, the payment can not increase by more than 7.5% of the previous year's payment. So, beginning with the 13th payment, the payment will increase to $691.52 ($643.28 x 1.075%).

The 7.5% payment cap is not applicable under two circumstances:

1. When the principal balance hits the maximum amount of negative amortization. Should that event occur, the loan will be recast subject to the principal balance at that time, the interest rate in effect at that time, and the remaining term on the loan. Let's say, for example, the loan hits the maximum amount of negative amortization with the 42nd payment and let's use a fully indexed rate of 6.5%. Given these parameters:

a) Principal balance equals $220,000 (original loan amount of $200,000 multiplied by 110%)
b) An interest rate of 6.5% (estimate of the margin plus the index value at
that time)
c) A remaining term of 319 months (original term of 360 less the 41 payments already made)

the new payment would be $1,450.57! That's a big ouch since your payment history looked like this:

Payments 01 - 12 $643.28
Payments 13 - 24 $691.52 (7.5% of the previous year's payment)
Payments 25 - 36 $743.39 (7.5% of the previous year's payment)
Payments 37 - 41 $799.14 (7.5% of the previous year's payment)
Payments 42 - 48 $1,450.57

When your loan hits the maximum amount of negative amortization is a function of what payment you have been making, e.g,. the minimum payment, the interest-only payment or a fully amortizing payment. Naturally, the less negative amortization you accrue, the less your payment will increase. Another important factor is the interest rate, of course. Rising rates and minimum payments will accelerate the amount of negative amortization accuring. Decreasing interest rates will help to defray negative amortization.

Once your payment approaches a fully amortized payment, you will then begin to experience payment decreases as well. Yes, it can happen! When I purchased my home, I selected the Option ARM for my loan program. At that time, deep discounted initial start rates were not available. The initial start rate was about 1% to 2% less than a 30-year fixed rate mortgage. Right after I purchased my home, rates began to decrease -- each and every month. When my first payment adjustment came up, I actually hit my payment cap on the downside! What that means is that because my payment could only decrease by 7.5%, I was making more than the fully amortized payment. Consequently, I had an extra $200-$350 being applied to my principal each month! My principal reduction was actually accelerated!

2. The next situation in which the payment cap is eliminated is every 5th year of the loan term. These adjustments are built into the loan program. With the 60th, 120th, 180th, 240th and 300th payments, the lender recasts the loan (again, takes the principal balance and effective interest rate at that time and re-amortizes the loan over the remaining term). These recasts must be done periodically to achieve a fully amortizing loan as the loan must be paid in full after 30 years (or the end of the original loan term, e.g., 15, 30 or 40, whatever it may be).

Thursday, November 09, 2006

Let's Take a Brief Break to Look at an Interesting Prediction

This is a reprint of part of a forecast I received from Brian Dragoo of PMC Mortgage (a wholesale lender):

Where is the Fed these days? “The market” indicates Federal Funds are poised to drop from their current 5.25% to 5.00% in March and then to 4.75% in September 2007. The forward curve (the rates at which buyers and sellers are setting into the future) tends to be better than the top economists over time, and investors are building in 2 rate cuts in 2007 along with the belief that long-term rates will barely budge for the next 5 years.

This is great news! The potential of decreasing interest rates coupled with a stable market makes for lower interest rates for both fixed and adjustable loan programs.

Periodic Cap

The periodic cap is the most the interest rate can increase or decrease at the designated interest rate change date. In the case of the Option ARM, there is no periodic cap. Theoretically, the interest rate could increase or decrease as much as the life-of-loan cap will allow. I stress theoretically, because the amount of increase or decrease is a function of the performance of the particular index. In all likelihood, the most agressively an index will adjust is probably around 0.25%. Most likely, the index will increase or decrease by around 1/10th or less per month. Again, check out the following link to obtain a history of your index:

http://mortgage-x.com/general/indexes/default.asp

Going back to our example, the 1% start rate was in effect for one month. Beginning with the second payment, the interest rate changes monthly thereafter. In the second month, our interest rate was 7.508% (margin of 2.75% plus index value of 4.758%). November's index value has been published which is 4.827%. Consequently, the index increased by .069% (4.827% - 4.758%), a less than 1/10% (0.100%) increase, which equates to a fully indexed interest rate of 7.577%. In our example, 7.577% will be the interest rate in effect for the third month.

Monday, November 06, 2006

Life-of-loan cap

The life-of-loan cap is the maximum interest rate the loan can adjust to during the loan term (typically 30 years). Many lenders offer life-of-loan caps ranging from 9.95% to 11.95% and up. Once your interest rate hits the designated life-of-loan cap value, it will stay at the 9.95% rate (or the applicable life-of-loan cap on your loan) until interest rates or more specifically, your index value, begins to decline once again.

The life-of-loan cap is not a negotiable feature. It is a predetermined value established by the lender. Shop around for the lowest possible life-of-loan cap. Naturally, the lower the life-of-loan cap, the more interest you can potentially save over the term of your loan.