10
Disadvantages of the FHA ARM The FHA imposes a maximum loan amount that differs from region to region, depending on the cost of living in each region.
Also, the FHA requires an up-front mortgage insurance premium (UFMIP) of 1.75%, although this cost may be financed along with the mortgage.
Mortgage Shopping Licensees should recommend that buyers look for competitive rates and a lender with a reputation for integrity and good service. Surveys show that mortgage interest rates and closing costs vary in metropolitan markets for the same mortgage product. While comparing prices is important, it may not be an easy task.
Lenders charge a variety of fees. Discount points are a significant item, almost like prepaid interest (pay more points to get a lower interest rate). Points vary from lender to lender in the same market area. The new Loan Estimate gives a borrower enough information to decide whether to pay extra points to get a lower interest rate.
The biweekly mortgage has the same disadvantages as other fixed-rate mortgages. In addition, the biweekly loan threatens those borrowers who do not maintain stable checking or savings account balances. The biweekly mortgage also locks borrowers into payment plans that they could set up themselves, at their own discretion, with a traditional 30-year loan. Some lenders also charge a setup fee.
Discussion Exercise 11.3 If the biweekly mortgage combines the good features of both the traditional 30-year fixed-rate mortgage and the 15-year fixed-rate mortgage, why is it so seldom used, comparatively speaking, to finance residential purchases?
The ARM's low initial interest rate and the borrower's ability to qualify for a larger mortgage top the list of advantages of adjustable-rate mortgages. ARMs are most appropriate for those who plan to hold the mortgage loans for no more than four years.
anytime the interest rate gap between a fixed-rate loan and an adjustable-rate loan reaches 3% in favor of the ARM, an ARM loan with interest-rate caps and a one-year Treasury bill constant maturity index should make sense to homebuyers. Many ARMs are now written with conversion privileges, allowing the mortgagors to convert to fixed-rate loans for a modest fee during a specified period.
There are three exceptions for which the PMI may continue: 1 If the loan is "high risk" 2 If the borrower has not been current on the payments within the year before the time for termination or cancellation 3 If the borrower has other liens on the property
loan pay an up-front mortgage insurance premium (UFMIP) of 1.75% of the loan amount on a 30-year mortgage. In addition, FHA charges an annual mortgage insurance premium (MIP) of .85% of the loan amount, in monthly installments. The MIP is canceled for borrowers with a 30-year loan closed before June 3, 2013, who have paid MIP for at least five years and achieved 22% equity in their house. For loans made on or after June 3, 2013 with a down payment of less than 10%, the MIP will never be removed.
lenders require an amount each month that includes
principal and interest plus escrow items—property taxes, homeowners insurance, and possibly mortgage insurance or homeowners/condominium association dues. This entire package of payments is commonly referred to as the PITI payment.
Regulation Z of TILA was amended by the Federal Reserve Board because of the losses sustained during the recent housing bubble. The amendment:
requires that fee appraisers be paid reasonable and customary compensation, prohibits coercion of appraisers for both permanent mortgages and home equity loans, prohibits appraisers and appraisal management companies from having financial or other interests in the properties being appraised, and requires creditors and closing agents that have information about appraiser misconduct to file reports to the appropriate state licensing authorities.
licensees should make sure the borrowers know: -what rate will be used when interest rate caps are applied to an ARM loan; -that the margin is one of the most important benchmarks in comparing lenders (most other ARM features are relatively similar, but the margins can vary considerably); -to seek another lender if the one they are considering has policies that call for ARM increases exceeding the 2% annual cap or the 6% lifetime cap; -not to consider loans that call for negative amortization;
-not to consider loans that call for negative amortization; -o compare up-front costs, such as underwriting fees, points, and origination fees, because some lenders offer lower interest rates but make up for it with inflated up-front costs; and -not to stretch their borrowing to the limit, as they could with a fixed-rate loan, because the payments remain fixed and income should increase. Borrowing to the limit can become a disaster when an ARM is involved. Prospective borrowers should calculate their first-year payments at the initial interest rate plus 2%; otherwise, the first adjustment could hurt them financially.
Advantages of a 15-year mortgage Because lenders get their money back sooner than they do with traditional 30-year mortgages, they charge slightly lower rates for 15-year loans. Also, the loans are paid off faster, less money is borrowed for less time, and less total interest is paid over the lives of the loans—more than 50% less.
As with a 30-year, fixed-rate loan, the interest rate on a 15-year mortgage does not change, and the monthly principal and interest payment does not go up. Finally, the higher monthly payment results in forced savings in the form of faster equity buildup.
In Practice Make the acceptance time short. The seller is more likely to decide quickly and not "shop" the offer. You pull out the MLS data from the house that shows the following information:
Sellers' names: Larry and Wilma Palmer Street address: 816 Harrison Court, Sunny Hills, FL Legal description: Lot 18, Block C, Old Hills as recorded in book 126, page 368, Houser County. Personal property included: range, draperies, rods, and window treatments (as shown by the MLS information). The Smiths also want to include the washer, dryer, and the riding lawn mower. You explain that these items are not included in the sale, but they want to try for them anyway.
Going to the Sellers' House You make extra copies of the offer, gather all the documents, and arrive at the Blue Sky Realty office at 6:15 pm. You show Hillary the bank's preapproval letter and give her a copy of the offer. If she has no questions about the offer, you ask if she'd like you to present it to the sellers and she agrees.
She also suggests that after presenting the contract, if the sellers have no questions, that you might excuse yourself so they have time to discuss the offer. This is very gracious on her part because she will not ask to you leave; it will be your idea. You go in separate cars to the house. Hillary waits outside so you can go in together.
Advantages of a biweekly mortgage A biweekly mortgage combines the benefits of the 30-year loan and the 15-year loan without the increased payments of the 15-year loan. It offers borrowers the affordability of the 30-year loan because the two biweekly payments come within a few pennies of the one monthly payment on a 30-year loan.
Fannie Mae requires that payments be deducted automatically from a borrower's checking or savings account every two weeks. Because more than half of the nation's workforce is paid on a biweekly basis, it is compatible with a large number of paychecks.
Advantages of a 30-year mortgage Monthly payments on the loan are spread over 30 years, offering the borrower protection against future increases in interest rates and inflation rates while providing for the orderly repayment of the amount borrowed.
Household budgets are easier to manage when the borrower does not have to plan for changing payment amounts or interest rates.
Longer adjustment periods are available Many borrowers prefer an ARM loan that won't adjust for several years. For example, the low initial rate may last for three, five, or seven years, then adjust once each year. Such loans would be called 3/1, 5/1, or 7/1 ARMs.
Other options would be for loans that had an initial rate that lasted five years, and then went to a fixed-rate loan at the prevailing rates available for the fifth year. This would be called a 5/25. There are 3/27s, 5/25s, 7/23s, or 10/30s. No one program is better for everyone, so each borrower must evaluate the possibilities based on his personal situation.
The Truth in Lending Act (TILA) requires that mortgage lenders disclose their annual percentage rates to potential borrowers. The annual percentage rate (APR) is a standard expression of credit costs designed to give potential borrowers an easy method of comparing lenders' total finance charges.
These financing costs include points and any other prepaid interest or fees charged to obtain the loan in addition to the contract interest cost. The APR must be, by law, the relationship of the total financing charge to the total amount financed, and it must be computed to the nearest one-eighth of 1%. Perhaps the best and most accurate definition of the APR is that it is the effective interest rate for a mortgage loan repaid over its full term.
Bond Money for First-Time Homebuyers States, counties, and cities can offer below-market mortgage financing by selling tax-free bonds.
These loans are available to first-time homebuyers (who haven't owned a home for the previous three years). Sometimes divorced persons who want to buy their own home also qualify. These programs come and go, so check with local lenders for availability.
The calculated (or actual) interest rate is calculated by adding the selected index to the lender's margin (index plus margin equals calculated interest rate).caps apply.
This calculated interest rate may be discounted during the initial payment period, but it is the rate to which all future adjustments and
Steps Before Loan Application Before buyers begin looking at houses, they should have a good understanding of their own financial capabilities and housing objectives. Licensees should explain both issues to their customers to help them understand the importance of being preapproved.
This is important because if the lender denies the application, the applicant may lose the opportunity to buy the home, as well as their application fees. Fees may range from $150 to $500, depending on the property and the circumstances.
To use this chart, start by finding the appropriate interest rate. Then follow that row over to the column for the appropriate loan term. This number is the interest rate factor required each month to amortize a $1,000 loan.
To calculate the principal and interest (PI) payment, multiply the interest-rate factor by the number of 1,000s in the total loan. For example, if the interest rate is 4% for a term of 30 years, the interest-rate factor is 4.78. If the total loan is $100,000, the loan contains 100 1,000s. Therefore, 100 × 4.78 = $478 PI only.
Overview you hope that, at the end of the showing process, the buyers will have found the right house. Sometimes, the buyers will tell you, "This is the house; we'd like to make an offer." More often, a buyer will say, "We love this house, but we'd like to think it over.
You can help in the decision making by ensuring that the buyer has been preapproved by a lender and by describing the process of making an offer. Unit 10 will help you become familiar with that decision-making process.
Helping the Buyer Decide to Make an Offer A buyer who lacks information may be reluctant to make an offer. What if I don't have enough cash? What if the lender turns me down? Could I lose my deposit?
can ensure that the buyer will have this information before showing properties. The steps are to: 1 get the buyer pre-approved by a lender, and get a Loan Estimate, 2 show the buyer the important financial aspects of the purchase, and 3 describe the sales process to the buyer.
It is just like a traditional 30-year loan, except that its monthly payment is higher, its interest rate typically is slightly lower, and it is paid off in 15 years. The 15-year mortgage saves the borrower thousands of dollars in interest payments.
dramatic savings from the 15-year plan. The gross savings, however, usually are overstated. The higher payments on the 15-year plan have an opportunity cost. If the difference were invested, the return on the investment would reduce the net cost of the 30-year mortgage. The tax savings from mortgage interest deductions also would reduce the savings.
Principal and interest payments on the mortgage are the largest part of the monthly PITI payment. Using the mortgage payment factors shown in Mortgage Factor Chart, multiply the loan amount by the appropriate factor to get the principal and interest portion of the payment.
example, the payment factor for a 30-year mortgage at 5% is 5.37. To calculate the monthly principal and interest for a 30-year loan of $198,000 at 5%, use the following equation: $198,000 ÷ $1,000 × 5.37 = $1,063.26
Calculating annual adjustments Once the initial interest rate is set, annual adjustments to FHA ARMs must be calculated. The first interest-rate adjustment may not occur sooner than 12 months from the due date of the first monthly payment or later than 18 months from that first designated payment date.
the first adjustment must be made during a six-month period or it is forfeited. This period permits lenders to complete the collection or pooling of many mortgages for sale to secondary-market institutions. Whatever date is designated as the initial interest-rate-adjustment date, all subsequent rate adjustments must be made on the anniversary of that first adjustment date.
Fixed-rate Mortgage
A loan secured by real estate that has the same rate of interest for the life of the loan.
Biweekly Mortgage
A mortgage that requires the borrower to make payments every two weeks (26 payments per year). The payment is calculated by dividing the monthly mortgage payment by two. The effective result is that the borrower makes 13 monthly payments per year.
The adjustable-rate mortgage (ARM) is an alternative to the traditional 30-year, fixed-rate, level-payment mortgage. The popularity of ARMs increases when interest rates rise, and they lose favor when interest rates are low.
An adjustable-rate mortgage is, as the term implies, a financing instrument that allows the lender to increase or decrease the interest rate based on the rise or fall of a specified index.
lenders sometimes reduce the first year's earnings by discounting the calculated interest rate, thus creating a lower initial interest rate. This helps to qualify potential buyers at artificially low interest rates, which may or may not be a service to the borrowers, and establishes the amount of the monthly loan payment during the first loan adjustment period.
Be aware that many lenders now use the second year's interest rate rather than the discounted rate as the qualifier. Both Fannie Mae and Freddie Mac require borrowers with less than a 20% down payment on one-year, adjustable-rate loans to be qualified at the initial interest rate plus 2%.
The main disadvantages of the ARM loan are the uncertain amounts of future mortgage payments and the difficulty in calculating adjustments in interest rates as they occur. Lenders, of course, do the actual calculation of adjustments, but they have been known to make mistakes, and such mistakes can be expensive to the borrowers.
Calculation details are spelled out in each loan document, but they are somewhat complicated and require the use of either a financial calculator or a handbook of ARM payment tables. For a borrower who wants to audit a lender's ARM adjustments without going to the trouble of research and math calculations
Sellers who receive an offer on their home have the following three possible responses: Acceptance Rejection Counteroffer
Acceptance Obviously, the selling sales associate hopes the response will be an acceptance. The offer is signed and becomes a contract between the buyer and the seller.Rejection If the price offered is very low and is obviously a "fishing expedition," the seller may be advised to reject the offer outright.Counteroffer If the offer is not acceptable but is close enough to be considered serious, a counteroffer form should be used. A counteroffer keeps the parties "at the table," making continued negotiations easier.
Disadvantages of a 15-year mortgage The monthly payment on a 15-year loan is higher, and the borrower forgoes investment opportunities voluntarily for the extra dollars paid on the loan each month.
Some income tax advantages related to home mortgages and investment opportunities are lost. The mortgage payment is not flexible, and any future increase in income tax rates could increase the 15-year mortgage's net costs.
The index to which a conventional ARM is tied can increase or decrease the volatility of interest rate changes. Four principal indexes are used for residential mortgages: 1 The London Interbank Offered Rate (LIBOR) index is the base interest rate paid on deposits between banks in the Eurodollar market.
2 The Monthly Treasury Bill Average (MTA) is a stable, slow-moving index. It is a 12-month moving average of the U.S. one-year Treasury bill. 3 The 11th District Cost of Funds Index (COFI) is another stable, slow-moving index, consisting of the weighted average of deposits and borrowings between banks in the Federal Home Loan Bank District of San Francisco. 4 Prime rate is the rate charged to most favored customers by major banks. This rate is commonly used for adjustments to home equity or second mortgages and can be quite volatile.
Overview The mortgage market has changed significantly in the recent past, particularly after the housing crash of the mid- to late- 2000s. Twenty years ago, commercial banks and savings associations originated more than 80% of home mortgages. That share has dropped sharply, and today mortgage companies are the dominant factor in the market, originating more than half of all home loans.
Driven by market forces, lenders offer a wide variety of mortgage products tailored to the needs of consumers. Experts expect the changes in the mortgage industry to accelerate. A general knowledge of these changes can enhance the opportunities available to the real estate professional. Developing strong relationships with lenders who preapprove loans for prospective buyers saves licensees' time and can significantly increase their income.
The fixed-rate, fully amortizing mortgage loan has been the standard of the real estate finance industry for the past 50 years. A 30-year term provides a reasonably low payment for the amount borrowed, while the interest rate, payment amount, and repayment schedule are set permanently at the beginning of the loan period.
Fixed-rate loans often are sold in the secondary market because they appeal to pension funds and other investors searching for a relatively safe investment with a known interest rate and a long duration.
Conventional lenders usually require that the borrower pay for private mortgage insurance (PMI). PMI protects the lender if the borrower defaults on the loan. The Homeowners Protection Act of 1998 established rules for automatic termination and borrower cancellation of PMI on home mortgages. These protections do not apply to government-insured FHA- or VA-guaranteed loans or to loans with lender-paid PMI.
For conventional home mortgages signed on or after July 29, 1999, PMI must, with certain exceptions, be terminated automatically when the borrower has achieved 22% equity in the home based on the purchase price, if the mortgage payments are current. PMI also can be canceled when the borrower requests it
all FHA ARMs must use the published one-year constant maturity Treasury security index, using the most recently available figure that applied exactly 30 calendar days before the designated change date. The new current index plus the constant margin rounded to the nearest one-eighth of one percentage point is the new calculated interest rate. It is then compared with the existing interest rate
If it is the same as the existing interest rate, no change is made to the existing rate. If it is up to 1% higher or lower than the existing interest rate, the new calculated interest rate becomes the new adjusted interest rate. If it is more than 1% higher or lower than the existing interest rate, the new adjusted interest rate is limited to a 1% increase or decrease of the existing interest rate.
A loan's APR assumes that borrowers will keep their loans for the full number of years for which the loans are written. History shows, however, that most borrowers either sell or refinance their homes in less than 12 years. The actual (effective) interest rate paid depends on the number of years a loan is kept.
If the borrower expects to keep the loan for longer than 12 years, divide the points by 8 and add the result to the note interest rate. For example, if a lender has offered a first mortgage for 30 years at 5% and 3 points, the effective interest rate would be 5.375%, computed as follows: note rate + (points ÷ 8) = effective interest 5% + (3 ÷ 8) = 5.375%
Summary A licensee should practice preparing offers on different types of properties with a variety of financing programs. Once the practice offer is written, you should role-play the explanation of the offer. Practice will give you the skills to help you get more transactions to the closing table. A sales associate should: get the buyer preapproved by a lender and get a Loan Estimate, show the buyer the important financial aspects of the purchase, and describe the sales process to the buyer.
If the buyer finds the right house but wants to delay making a decision, suggest that you prepare an "as is" contract form. They may decide to go ahead after reviewing the paperwork. After writing the offer, take the buyers back to their car, then call the listing agent for an appointment. Go with the listing agent to present the offer. A seller has three possible responses to a counteroffer: Acceptance Rejection Counteroffer Use a counteroffer form if necessary, rather than marking up the original contract To accept the counteroffer, a buyer need only sign the counteroffer form.
Borrowers should be cautious when payments are capped and interest rates are not because of the probability thatnegative amortization will be involved in the loan. Negative amortization occurs when the monthly payment is not enough to pay the interest on the loan. The shortfall is added to the mortgage balance.
Lenders must provide potential borrowers with a worst-case example at loan application. If conditions should warrant maximum interest rate increases, this disclosure must show the maximum possible payment increases at the earliest opportunities.
Components of Adjustable-Rate Mortgages The primary elements in determining the acceptability of an ARM from the borrower's viewpoint are the index, the lender's margin, the calculated interest rate, the initial interest rate, and the interest rate caps.
Lending institutions can link the interest rate of a conventional ARM to any recognized index (indicator of cost or value) that is not controlled by the lender and is verifiable by the borrower. The margin, also called the spread, is a percentage added to the index. The margin usually remains constant over the life of the loan, while the selected index may move up or down with fluctuations in the nation's economy
Seller-Paid Closing Costs A buyer must have the necessary income and debt ratios to afford a mortgage payment. Coming up with enough cash to close is another big hurdle. The closing costs and prepayments on a typical mortgage loan for $120,000 can reach $5,000, in addition to the down payment. Many qualified buyers are forced to rent in order to save enough funds to buy.
Licensees who know lender standards on seller-paid closing costs are able to sell to these buyers much sooner. The seller can pay part of the closing costs for conventional, FHA, and VA mortgage loans. Maximum Seller-Paid Closing Costs That Can Be Applied to Buyer's Closing Costs, Prepaid Items, and Reserves, Expressed as a Percentage of the Purchase Price shows the current allowed percentages.
ARM loans have lower initial rates than fixed-rate mortgages primarily because lenders can avoid the risk of market interest changes for the full 30 years of the loan period. ARM loans reduce the risk, so lenders don't need as much cushion for contingencies
New ARM products combine the ARM features of a lower initial interest rate with a longer fixed-rate period between adjustments. For example, 3-year, 5-year, or 10-year ARMs are available at slightly higher initial rates than 1-year ARMs, but at lower rates than 30-year fixed mortgages.
The GFE was combined with the TIL and is now called the Loan Estimate (click here). The Loan Estimate must be given to the borrower within three business days of the loan application. Also, the lender must deliver or place in the mail the Loan Estimate no later than seven business days before closing.
The HUD-1 Settlement Statement was combined with the TIL and is now called the Closing Disclosure. It must be received by the borrower at least three business days before the closing.
FHA required disclosure statement All approved lenders making FHA adjustable-rate loans must provide each borrower with a mortgage loan information statement that includes a worst-case example form.
The borrower must receive this statement and be given an opportunity to read the informative explanation before signing the borrower's certification on the loan application. Licensees are urged to obtain personal copies of the FHA adjustable-rate mortgage disclosure statement to use when counseling clients or advising customers.
the 15-year mortgage robs the borrower of some flexibility. A 15-year mortgage cannot be extended to 30 years, but a 30-year mortgage can be paid off in 15 years if the borrower accelerates monthly payments to create a 15-year loan or remits a lump-sum payment on principal each year.
The borrower retains the right to decide when, or if, he will make extra payments. Borrowers must evaluate the benefits of the 15-year mortgage based on their personal situations.
Advantages of the FHA ARM An FHA ARM has several advantages over a conventional ARM. Often, an FHA ARM bears a slightly lower interest rate because of the government insurance provided the lender. In addition, the FHA commonly uses more lenient qualification formulas.
The down payment (required investment) also is lower in many cases, and the interest rate increase each year is limited to 1%, with a lifetime cap of 5% (conventional caps usually are 2% per year, with a 6% lifetime cap). FHA loans continue to be easier to assume than conventional loans, although the FHA has increased the requirements for assumption of FHA loans. The FHA now requires a review of the creditworthiness of each person seeking to assume an FHA-insured loan.
The biweekly mortgage alternative is a fixed-rate loan, amortized over a 30-year period, with payments made every two weeks instead of every month. Borrowers pay half the normal monthly payment every two weeks, which means 26 payments each year, or the equivalent of 13 monthly payments.
The extra month's payment each year reduces the principal faster and results in considerable savings in interest, as well as a reduction in the duration of the loan to between 19 and 21 years.
interest rates for biweekly mortgages are comparable to the rates charged for traditional 30-year mortgages. Most biweekly loans are scheduled to mature in 30 years, even though the actual number of years to maturity depends on the interest rate.
The higher the interest rate, the larger the monthly payment, and the more that is applied to reducing mortgage principal. A biweekly mortgage with a 7% interest rate, for example, would be paid off in approximately 23 years, 9 months.
For more than 30 years, lenders were required to give the truth-in-lending (TIL) disclosure and the Good Faith Estimate (GFE) disclosure to consumers when they applied for a mortgage. For the closing, the title-closing agent would prepare the TIL and the Settlement Statement (HUD-1). Two different federal agencies developed these forms separately, under two federal statutes.
The information on the forms was overlapping, inconsistent, and confusing.As directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Consumer Financial Protection Bureau (CFPB) combined the four forms into two.
Federal Housing Administration (FHA) to insure adjustable-rate mortgages on single-family properties. The interest rate is the sum of the index and the margin. The index changes, but the margin will remain the same over the life of the loan.
The initial interest rate may be a result of combining the current one-year Treasury bill index with the margin at the time the loan is closed. This combination of components produces what is often called the calculated interest rate
Summary Buyers should be preapproved before looking at houses. Lenders must disclose the annual percentage rate to potential borrowers. The APR is the effective interest rate for a mortgage loan repaid over its full term. When considering whether to pay discount points, divide the difference in monthly payments into the total dollar amount of points to determine how many months it will take to break even. PITI stands for principal, interest, taxes, and insurance. The standard mortgage loan is the 30-year fixed-rate mortgage. Many borrowers prefer the 15-year fixed-rate mortgage because of the savings in interest over the life of the loan, but payments are substantially higher. The biweekly mortgage alternative is a fixed-rate loan, amortized over a 30-year period, with payments made every two weeks instead of every month. Borrowers pay half the normal monthly payment every two weeks, which means 26 payments each year, or the equivalent of 13 monthly payments.
The primary elements in determining the acceptability of an ARM from the borrower's viewpoint are the index, the lender's margin, the calculated interest rate, the initial interest rate, and the interest rate caps. The interest rate is calculated by adding the selected index to the lender's margin. ARMs are most appropriate for those who plan to hold the mortgage loans for no more than four years. FHA ARMs have an advantage over conventional ARMs because the interest-rate increase each year is limited to 1%, with a lifetime cap of 5% (conventional caps usually are 2% per year, with a 6% lifetime cap). Private mortgage insurance must be terminated automatically when the borrower has achieved 22% equity in the home based on the purchase price, if the mortgage payments are current. PMI also can be canceled when the borrower requests it upon achieving 20% equity in the home based on the original property value. FHA charges an up-front mortgage insurance premium and a monthly mortgage insurance premium. The monthly MIP is canceled for borrowers who have achieved 22% equity in their house and after five years have elapsed, based on the lower of the purchase price or the appraisal.
Any mortgage written to preclude change in the interest rate throughout the entire duration of the loan is a fixed-rate mortgage. The term includes the traditional 30-year mortgage, the 15-year mortgage, and the biweekly mortgage.
The use of a due-on-sale clause in a fixed-rate mortgage reserves the lender's right to make an interest-rate change if a transfer of ownership takes place. Practically all conventional mortgages issued since the early 1980s contain a due-on-sale clause.
The main appeal of ARM loans is the lower-than-market initial interest rates offered as inducements (teasers). But without some type of protection from unacceptable increases in interest rates, borrowers would be in danger of being unable to make future mortgage payments.
To prevent this, most lenders and all federal housing agencies have established standards calling for ceilings on increases. Three types of caps (ceilings) limit increases in the calculated interest rates of ARM loans: 1 Amount of the increase that can be applied at the time of the first adjustment (for example, cap of 1% or 2% per adjustment period) 2 Amount of increase that can be applied during any one adjustment interval (for example, no more than 2% during any one-year period) 3 Total amount the interest rate may be increased over the life of the loan (for example, no more than 6%)
Disadvantages of a 30-year mortgage If overall interest rates drop, as they did in years 2000-2001, the rate on a fixed-rate mortgage will not go down with them.
To take advantage of lower interest rates, the original loan must be refinanced, requiring the borrower to pay substantial closing costs on the new loan.
When the lender gives a prospective borrower a rate quote, the borrower is often undecided about whether to pay discount points. Discount points can be considered prepaid interest that will reduce the interest rate on the note.
a borrower has a "menu" of interest rates based on the amount paid as discount points. $100,000 30-Year Fixed-Rate Mortgage Comparison of Rates and Discount Points shows a sample market quote for a 30-year fixed-rate loan. Fluctuations in the market cause differences from day to day in the differential of discount points and yield.