Loan Types
Fixed Rate Loan ProductsThe old standby, the 30 year fixed, has survived the decades of evolution of the mortgage industry because it fundamentally matches people's desire for financial stability and their potential for staying in their house for the long haul. As rates rise, most everyone wants a 30 year fixed. As rates drop, they want to switch into a better one. 1.The 40 year fixed (similar to the 30 year fixed, but with lower payment and a longer term) 2.Interest Only30 year fixed.
30 Year Fixed Rate  the interest rate is fixed for 30 years and the loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. 20 Year Fixed Rate  the interest rate is fixed for 20 years and the loan is fully amortized (or paid off) in 20 years if the normal payment schedule is followed. 15 Year Fixed Rate  the interest rate is fixed for 15 years and the loan is fully amortized (or paid off) in 15 years if the normal payment schedule is followed. 10 Year Fixed Rate  the interest rate is fixed for 10 years and the loan is fully amortized (or paid off) in 10 years if the normal payment schedule is followed. 
Fixed Rate Balloon Loan Products10/20 Conforming Loan  the rate is fixed for a period of 10 years and then converts to a new fixed rate for the remaining 20 years. The new rate is typically based on the Fannie Mae net yield index and is added to a predetermined margin. Note that converting to this new rate is permitted only if the prescribed conditions are met and if not, then the loan is due and payable to the lender as a balloon loan (review your loan documents carefully). The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. 5/25 Conforming Loan  the rate is fixed for a period of 5 years and then converts to a new fixed rate for the remaining 25 years. The new rate is typically based on the Fannie Mae net yield index and is added to a predetermined margin. Note that converting to this new rate is permitted only if the prescribed conditions are met and if not, then the loan is due and payable to the lender as a balloon loan (review your loan documents carefully). The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. 30/15 (30 due in 15)  the rate is fixed for a 15 years and the payment is amortized over 30 years to provide for a lower monthly payment. This loan is due and payable as a balloon loan at the end of 15 years. 
Anatomy of the ARMTo determine the rate on your adjustable mortgage, you first need to understand how an ARM works. The following terms are integral to an ARM: Fully Indexed Rate  the rate you must pay, barring any periodic caps, in order to fully amortize or pay off the loan. Margin  the fixed component of your ARM loan, constant throughout the life of the loan. Index  the variable component of your ARM loan, changes on a monthly basis. Examples of indices include the Cost of Funds (11th District), One Year Treasury, Monthly Treasury Average (MTA), 1 Year Treasury Average, CD, LIBOR, etc. INDEX + MARGIN = FULLY INDEXED RATE 
Intermediate ARM's10/1 ARM  the rate is fixed for a period of 10 years after which in the 11th year the loan becomes an adjustable rate. The adjustable is tied to the 1year treasury index and is added to a predetermined margin (usually between 2.253.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 11th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 7/1 ARM  the rate is fixed for a period of 7 years after which in the 8th year the loan becomes an adjustable rate. The adjustable is tied to the 1year treasury index and is added to a predetermined margin (usually between 2.253.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 8th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 5/1 ARM  the rate is fixed for a period of 5 years after which in the 6th year the loan becomes an adjustable rate. The adjustable is tied to the 1year treasury index and is added to a predetermined margin (usually between 2.253.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 6th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 3/1 ARM  the rate is fixed for a period of 3 years after which in the 4th year the loan becomes an adjustable rate. The adjustable is tied to the 1year treasury index and is added to a predetermined margin (usually between 2.253.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 4h year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 
Traditional ARM's1 Year Treasury ARM (1 YR TBill)  the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1year treasury index which is added to a predetermined margin to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 1 Year Treasury Average ARM  the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1year treasury average index which is added to a predetermined margin to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). Monthly Treasury Average ARM (MTA)  the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the monthly treasury average index which is added to a predetermined margin to arrive at the new monthly rate. This loan may also have periodic payment caps as well as interest rate caps, and therefore could have the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be. (Also see anatomy of an ARM for additional information). COFI ARM (Cost of Funds)  the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the 11th district cost of funds index (COFI) which is added to a predetermined margin to arrive at the new monthly rate. This loan may also have periodic payment caps and therefore the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be. (Also see anatomy of an ARM for additional information). 6 Month CD ARM  the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6month CD index which is added to a predetermined margin to arrive at the new semiannual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). LIBOR ARM (London Interbank Offer Rate)  the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6month LIBOR index which is added to a predetermined margin to arrive at the new semiannual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 
All of our ARM programs have available Interest Only options.
Interest Only Loans allow you the flexibility of investing your money where you wish, not just in your house. During the first five years of your loan you can either pay interest only, or include whatever amount of principal you wish, even a large principal prepayment if desired. After five years your loan will require monthly payments of both principal and interest.
The popularity of Interest Only mortgages is well founded. Ten years ago, these products were only for the very wealthy, but as people have become more sophisticated financially, these mortgages have found strong footholds throughout the US.
Not only can Interest Only mortgages cut monthly payments by up to 30%, they have a number of deeper benefits.
Their first appeal is for people who have inconsistent expenses or income. Many people with interest only loans pay principle in months when they can and interest only when they need to. The beauty of interest only mortgages is that each month you pay excess principle, the next month's interestonly payments are correspondingly lower (since the balance gets reduced).
Investors favor interest only loans because the cash freed up each month, instead of going to nonrevenue generating principle, can go to investments.
For people expecting large lump sums of money, such as inheritance or impending property sales (such as from an old primaryresidence still on the market), interest only enables you to radically reduce the balance and payments of your mortgage, without needing to refinance. With a traditionally amortizing mortgage, all paying down your mortgage prematurely would do would be shorten it's term.
For houses in rapidly increasing property value markets, Interest Only products make great sense since because appreciation provides the equity when you move, not paying down the mortgage.
For people who look to manage their money effectively, interest only mortgages are a massively valuable tool in their arsenal.
The reduction in minimum payment is dramatic.
Example:
Loan Amount: $333,700
Interest Rate: 4.500% (for example use only, not a rate quote)
Minimum monthly payments:
Interest (4.50%) Only Mortgage = $1,251
Principal and Interest (4.50%) Mortgage = $1,691
Reduced monthly payment via Interest Only Mortgage= $440
Comparing this minimum payment of $1,251 against the higher rates that many homeowners currently have and the savings is even more pronounced:
Same scenario as above but current rate on existing Principal and Interest loan is 5.875%:
Monthly payment is $1,973.96.
Reduced monthly payment via Interest Only Mortgage = $723
Please be fully aware that with the Interest Only mortgages if you pay the minimum required amount (interest only) during the first five years your principal balance will not start reducing until year six when principal and interest payments start.
Fixed Rate Loan Products30 Year Fixed Rate  the interest rate is fixed for 30 years and the loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. 20 Year Fixed Rate  the interest rate is fixed for 20 years and the loan is fully amortized (or paid off) in 20 years if the normal payment schedule is followed. 15 Year Fixed Rate  the interest rate is fixed for 15 years and the loan is fully amortized (or paid off) in 15 years if the normal payment schedule is followed. 10 Year Fixed Rate  the interest rate is fixed for 10 years and the loan is fully amortized (or paid off) in 10 years if the normal payment schedule is followed. 
Fixed Rate Balloon Loan Products10/20 Loan  the rate is fixed for a period of 10 years and then converts to a new fixed rate for the remaining 20 years. The new rate is typically based on the Fannie Mae net yield index and is added to a predetermined margin. Note that converting to this new rate is permitted only if the prescribed conditions are met and if not, then the loan is due and payable to the lender as a balloon loan (review your loan documents carefully). The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. 5/25 Loan  the rate is fixed for a period of 5 years and then converts to a new fixed rate for the remaining 25 years. The new rate is typically based on the Fannie Mae net yield index and is added to a predetermined margin. Note that converting to this new rate is permitted only if the prescribed conditions are met and if not, then the loan is due and payable to the lender as a balloon loan (review your loan documents carefully). The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. 30/15 (30 due in 15)  the rate is fixed for a 15 years and the payment is amortized over 30 years to provide for a lower monthly payment. This loan is due and payable as a balloon loan at the end of 15 years. 
Adjustable Rate Mortgage ARMs If you know you're never going to use something, why pay for it? If you know you're only going to keep your mortgage for a 5 years, why pay the bank for 25 more years of a fixed rate? Adjustable Rate Mortgages (ARMs) trade long term security for short term savings. Most people refinance every 4 years and move every 6. Statistically, most people would be better off with an ARM. 1 Year Treasury ARM (1 YR TBill)  the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1year treasury index which is added to a predetermined margin to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 1 Year Treasury Average ARM  the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1year treasury average index which is added to a predetermined margin to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). Monthly Treasury Average ARM (MTA)  the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the monthly treasury average index which is added to a predetermined margin to arrive at the new monthly rate. This loan may also have periodic payment caps as well as interest rate caps, and therefore could have the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be. (Also see anatomy of an ARM for additional information). COFI ARM (Cost of Funds)  the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the 11th district cost of funds index (COFI) which is added to a predetermined margin to arrive at the new monthly rate. This loan may also have periodic payment caps and therefore the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be. (Also see anatomy of an ARM for additional information). 6 Month CD ARM  the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6month CD index which is added to a predetermined margin to arrive at the new semiannual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). LIBOR ARM (London Interbank Offer Rate)  the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6month LIBOR index which is added to a predetermined margin to arrive at the new semiannual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information). 
Creative Financing
103% LTV Conventional Home Loans and MortgagesThe 103% LTV is a conventional fixed rate home loan where the monthly payments remain the same over the life of the loan. Once the mortgage is in effect, the interest rate does not fluctuate but remains constant. Furthermore, the loan is 103% of the sales price of the home. This allows for 3% of the loan amount to be used towards the buyer's closing costs. The fixed rate loan is one of the most commonly used mortgages for residential financing in America. The greatest advantage for a home buyer is the predictability of the payments each month because it never changes. This type of loan is often recommended for home buyers living on a fixed income, a set budget, or those planning on living in their home for more than five years. If interest rates increase, the loan rate will remain the same. Unfortunately should rates decline below the set interest rate on the loan, the only way to change it is to refinance the mortgage and incur a loss of equity or additional closing costs to take advantage of the lower interest rate. The key disadvantage of this type of loan is the high loan amount in relation to the value of the home. Generally a home buyer must occupy the home for at least three to five years before he/she is able to cover normal selling costs should that become necessary. Otherwise there may not be enough equity to cover real estate commissions and typical seller costs when the home is sold. 
107% LTV Conventional Home Loans and MortgagesThe 107% LTV is a conventional fixed rate home loan where the monthly payments remain the same over the life of the loan. Once the mortgage is in effect, the interest rate does not fluctuate but remains constant. Furthermore, the loan is 107% of the sales price of the home. This allows for 3% of the loan amount to be used towards the buyer's closing costs and an additional 4% to be used towards paying off consumer debt. The fixed rate loan is one of the most commonly used mortgages for residential financing in America. The greatest advantage for a home buyer is the predictability of the payments each month because it never changes. This type of loan is often recommended for home buyers living on a fixed income, a set budget, or those planning on living in their home for more than five years. If interest rates increase, the loan rate will remain the same. Unfortunately should rates decline below the set interest rate on the loan, the only way to change it is to refinance the mortgage and incur a loss of equity or additional closing costs to take advantage of the lower interest rate. The key disadvantage of this type of loan is the high loan amount in relation to the value of the home. Generally a home buyer must occupy the home for at least three to five years before he/she is able to cover normal selling costs should that become necessary. Otherwise there may not be enough equity to cover real estate commissions and typical seller costs when the home is sold. 
Second Mortgages: 30 Year Fixed Rate  the interest rate is fixed for 30 years and the loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. 15 Year Fixed Rate  the interest rate is fixed for 15 years and the loan is fully amortized (or paid off) in 15 years if the normal payment schedule is followed. 30/15 (30 due in 15)  the rate is fixed for a 15 years and the payment is amortized over 30 years to provide for a lower monthly payment. This loan is due and payable as a balloon loan at the end of 15 years. Home Equity Lines: Prime Rate  an equity line of credit with a loan term ranging from 15 to 25 years. The rate is based on the prevailing prime rate, which is added to a fixed margin depending upon a borrower's individual credit and equity. The line of credit offers checkwriting privileges and interest is paid only on the funds drawn from the account. A draw period exists from which a borrower may access the funds after which the repayment period begins so that the equity line is fully paid at the end of the term. The 50 Year Mortgage: The 50year mortgage originated in Southern California in early 2006. It was developed to allow more people the opportunity to purchase a home that might be slightly out of their reach otherwise. The general concept behind a 50year mortgage is to increase the duration of the loan, and thus lower each payment. With home prices at historic highs, these features allow more people to qualify for a home loan and realize their goal of home ownership. Most 50year mortgages are set up as 5/1 hybrid loans where the interest rate is fixed for the first 5 years and adjustable thereafter where the rate is determined by an index (the LIBOR for instance). In general, 50year loans are a better alternative and less risky than other small payment options, such as the interestonly mortgage. With 50year mortgages you actually build equity in your home while maintaining a very low monthly payment. A 50year loan is especially good for those who want to purchase a home and expect to either sell or refinance in the next 57 years. If you want to get no obligation quote on a fifty year loan please fill out the basic information below. We look forward to saving you and you family money this year! 
No Doc, Stated or No Ratio Mortgages
Whether your income is inconsistent, complicated and difficult to prove or simply something you want to keep private, you have many options, each with strengths and weaknesses. It pays to know the differences.
While different lenders have many different names for these kinds of programs, they all boil down to the general premise that lenders are willing to make mortgages and trust you to pay them back as long as you have the credit scores. Depending on the lender, they may classify the loan as higher risk, but if the loan to value ratio is low enough and your credit is fine, they will keep it at a neutral level of risk and pricing is the same as if you had fully documented your income.
There are a number of flavors of nodoc products, depending on the lenders. Your loan officer will help you understand the choices. While each type has numerous names in the industry, the most basic versions are:
No Doc A true nodoc loan means that there is zero documentation or description of income or assets specified in the application. The lender does not request or require knowing anything about your income. This is the highest risk loan for the lender and, at higher loantovalue ratios, the most expensive. As a side benefit "NoDoc" loans are the fastest and easiest to collect documents for and process because there's hardly anything in the file. With good credit, often there is rarely a reason in the file for a loan to get rejected or held up. After doing a nodoc loan, many people decide that this is how a loan should be.
No Ratio No ratio loans are when the income amount is not specified, but, depending on the lender, the source is. In the good credit world, these mortgages are becoming much more popular with brokers and lenders because they remove the liability for income fraud that has become common on stated income loans.
Stated Income Stated income loans are the old standby of specifying an income when one would be difficult to prove. Unfortunately, over the past couple years, these loans have been a vehicle for a high level of fraud when consumers or lenders state an income that the borrower does not actually make. In such circumstances, there is considerable risk to the borrower that is not often disclosed by the broker or lender.
Stated Assets With many lenders, many of the above loans can be combined with stating assets, instead of documenting the assets. There is marginal benefit to stating assets as there are also a number of programs available with no asset reserves required. These noreserve and lowreserve programs sidestep the risk of stated asset fraud.
Option Arm Products
Before we dwell into the different payment options you must understand that option ARM loan programs are not for everyone however they do serve a very valid purpose for a select group of homeowners. Short term homeowners, self employed individuals and real estate investors seem to make up the greatest demographics behind these loan programs.
The advertisements hear on the radio and published in newspapers usually refer to 1% payments but the actual interest rate is much higher. the 1% is simply one of your payment options. It's a minimum payment based on 30 year principal and interest amortization at 1%. If you only pay the minimum (and many people do) than the remaining interest accrued will simply be tacked on to your loan balance. Essentially, the longer you only pay the minimum payment the larger your loan balance grows.
What Are The Payment Options?
Option Arm loans come standard with four (4) payment options however a couple of these options are only available if the full principal and interest payment is less than the minimum payment due.
Additionally, there are some safeguards built in to these loans to reduce your risk exposure from rising interest rates. These safeguards are generally:
The Payment Change Cap limits how much your minimum monthly payment can increase or decrease from the previous minimum payment. You should note that many lenders provide an exception in your note so this cap is not in effect during certain periods of your note.
Option 1  Minimum Payment
This option (known as the Minimum Payment Option) provides the greatest monthly cash flow savings. Your payment will change annually and is initially calculated using the initial interest rate for the first 12 months. After the first year, this payment is usually recalculated annually and based on the outstanding principal balance, remaining term and current market rates. Before applying for an option arm loan make sure to ask what index your loan is based on and the margin (see below). A Payment Change Cap* is in effect with most programs usually capping any change to within 7.5% of your original payment (annual increase or decrease)
Option 2  Interest Only Payment
Just like the popular interest only mortgage programs this option helps the homeowner prevent any avoid deferred interest by paying the minimum monthly payment plus any additional interest accrued during the month.
*Not offered if the interest only payment is less than the minimum payment due.
Option 3  15 Year Fixed Rate Payment
This option allows consumers to apply the largest contribution towards principal and term reduction. The payment required to satisfy this is calculated by amortizing your loan based on a 15year term from the first payment due date.
* This option is offered only on 30 or 40year term option arm programs and is no longer present once the loan reaches its 16th year.
Option 4  30 Year Fixed Rate Payment
This is the fully amortized payment based on a 30year loan and is calculated each month based on the prior month's interest rate, loan balance and remaining term. The biggest advantage to this payment option is that the payment pays all of the interest due and reduces your principal.
*Not offered if the interest only payment is less than the minimum payment due.
Ask Yourself...  

Understanding 1% Mortgages
It is a well known fact that borrowers are faced with a myriad of choices when applying for a new mortgage loan these days.
Fixed rate, variable rate, and hybrid adjustable rate loans are now commonplace and within reach of just about everyone these days.So is it any wonder that its become increasingly difficult for a borrower to understand which loan program is truly the best loan for them?
One of the more popular and welldebated mortgage loans over the past few years has become what is commonly known as the payment option mortgage or pickapay home loan.These are the loans that are often advertised as 1% home loans because they offer the borrower the option to make a payment based upon a very low payment rate.
What has become apparent recently is that there is so much confusion surrounding these loans that many people automatically write them off as either good or bad without really taking the time to fully understand what makes them tick or how to take full advantage of them.
It is important to understand that the payment option mortgage loan is not a new concept in home loans or to the lending industry.This loan program has been around for over 20 years and was originally designed for investors who wanted to be able to free up some of their monthly cash flow so that they could channel these funds into opportunities that would allow their money to work for them.
There are as many variations on the name of this loan depending upon the corresponding index that the particular loan program is tied to.Suffice to say the list is a long one and commonly used indexes are the: COFI, COSI, CODI, MTA, LIBOR, etc (in case you were wondering  COFI, CODI, COSI, MTA, & LIBOR are all acronyms for the names of indexes that these loans are tied to)
When determining which index should be used, thought should be given to several factors including current market conditions and the likely useful life of the loan among other factors.
The bottom line is that these loans have become very popular because they are ultimately designed to give the borrower maximum payment flexibility on a monthtomonth basis  thus providing the borrower with the ultimate control over how they pay their mortgage loan.
The one obvious benefit is that they offer the borrower the option of a mortgage payment that is much, much lower that they could ever hope to achieve with a conventional fixed rate or adjustable rate mortgage.
The payment option loans available today can present a tremendous opportunity to a borrower if utilized correctly.On the flip side if a borrower does not invest the time up front to fully understand the mechanics of these loans and how they work, they could ultimately be disappointed in them.
To help someone understand how a payment option mortgage works, a good place to start would be to understand a traditional mortgage product which most people are very familiar and comfortable with.
With a traditional fixedrate mortgage, the loan is amortized (paid off) over a set number of years determined by the borrower at the time of application.The most common choices are usually 10, 15, 20, or 30 years.
To figure out the payment on a fixed rate mortgage one needs to know 3 factors:1. Loan amount 2. Term (number of years to be paid off) and 3.Interest Rate
Lets look at the following scenario as an example:
Tom and Julie own a home that is appraised at $320,000.They are looking to borrow $250,000.They would like a fixed rate mortgage at 6.5% and would like to pay off their mortgage in 30 years.
1. Loan Amount:$250,000
2.30 years (360 months)360
3.6.5% (fixed rate)6.5%
PAYMENT:$1580.17
This is a fairly simple calculation once we understand the 3 factors above (loan amount, term, and interest rate).
For reference:fully amortizing  means the loan is paid off in full at the end of the term provided the principal and interest is paid each month for the life of the loan.
With this type of loan Tom and Julie would make a payment of $1580.17 (principal and interest) and their loan would be paid off in 30 years.(Please note:Tom and Julies loan could be paid off sooner if they decided to pay extra each month or decided to payoff their loan with the proceeds from a sale of their property or the proceeds from a new loan or by even using their own assets to pay off the loan)
With a payment option loan things become a bit more complicated because of the monthly payment options available to the borrower.
Instead of having just 1 monthly payment option (like the $1580.17 as referenced the example above), Tom and Julie would now have 4 different options that they could elect to pay based upon their monthtomonth budget and financial objectives.
Lets look at the following scenario as an example:
1.Loan Amount:$250,000
2.30 years (360 months)360
3.1% pay rate or 7.5%
fully indexed rate1% or 7.5%
PAYMENT: (Tom and Julie get to pick 1 of the following 4 payments every month)
Option 1:(minimum payment at 1%) $804.10
This option gives the lowest monthly payment but adds deferred interest also known as negative amortization to the outstanding principal balance of the loan.This means that the outstanding balance of their loan is going to increase each month that Tom and Julie make this payment.In essence they are adding $758.40 each month to the balance of their loan for each month that they opt to make the minimum payment.(Note that $758.40 is the difference between their interest only payment at 7.5% ($1562.50 as referenced in Option 2 below) less their minimum payment at 1% ($804.10).
$1562.50 $804.10 = $758.40
IfTom & Juliewere to continue to make this minimum payment for 12 consecutive months their loan balance would be $259,100.80
$758.40 (deferred interest) x 12 months = $9100.80
$250,000 (original loan amount) + $9100.80 (deferred interest) =$259,100.80
If you are following along here the first question that probably comes to mind is that this type of arrangement doesnt seem to make sense?Why would anyone be interested in this type of home loan you might ask?
In order to answer this question we need to take a look at the bigger picture in order to fully understand why and how people are using this loan program to their advantage.
When weighing the facts, one also needs to balance the potential for deferred interest ($9100.80 above) with the fact that a home is an asset that appreciates on average 3%5% per year.So if the value of Tom and Julies home was appraised for $320,000 when they took their new payment option loan, it is conceivable that their home may be worth $329,600 ($320,000 x 3% = $9600) after 12 months based upon a conservative annual appreciation of 3% per year.
So exactly what has happened in this example?
The value of their home has gone up to $329,600
The balance of their loan has gone up to $259,100.80
After 1 year of having this loan, Tom and Juliesnet equity position has actually increased (albeit everso slightly) when taking into account the 3% appreciation on their home as well as the deferred interest on their loan.Basically, they havent lost any ground and have gained only a very minimal amount of equity buildup in their property due to the 3% appreciation they have experienced on their home.
Now lets take this 1 step further:
What if Tom and Julie decided to take the extra monthly cash flow (roughly $775 per month  based upon the difference in monthly payments between the fixed rate mortgage payment of $1580.17 less Option 1 minimum payment of $804.10 from the example above) that they now have and were to invest this money?They would have $9300 at the end of year 1 without earning a dime of interest on that money.If they decided to invest in something that offered them a modest return on their money, they may have even more money saved at the end of year 1.
<Or>
What if Tom and Julie decided to use the extra monthly cash flow to pay down their outstanding consumer/credit card debt which they are currently being charged 10%20% for?
The point here being is that as we dig a bit deeper into understanding the bigger picture, the payment option loan program can work very well when (and only when) utilized in the correct manner by the borrower.
Option 2:
(interest only at fully indexed 7.5%)$1562.50
This option pays only the total interest due on the loan.It does not pay off any principal unless Tom and Julie were to pay extra each month to do so.Furthermore, since Tom and Julie are paying the full interest on the loan, there is $0 deferred interest (negative amortization) being added to the outstanding balance of the loan itself.
After year 1, Tom and Julies equity position would look like this after factoring in a modest 3% appreciation on their home:
Value:$329,600
Loan Balance:$250,000
Option 3:
(30 yr at fully indexed 7.5%)$1748.04
This option is paid in full after 30 years if this payment is made each and every month and the rate were to stay at 7.5%.
After year 1, Tom and Julies equity position would look like this:
Value:$329,600
Loan Balance:$247,774
Option 4:
(15 yr at fully indexed 7.5%)$2317.53
This option is paid in full after 15 years if this payment is made each and every month and the rate were to stay at 7.5%
After year 1, Tom and Julies equity position would look like this:
Value:$329,600
Loan Balance:$240,940
Please note the following terminology used in reference to the payment option mortgage programs available today:
Pay Rate is the introductory rate allowed for a certain period of time as determined by the individual lender.
Fully Indexed Rate is determined by adding 2 factors together:The Index + The Margin = The Fully Indexed Rate.
The Indexes used for these loans are many.It is important to note that there are many variations of this product offered by many different lenders.The more common indexes are the COSI, COFI, CODI, MTA, & LIBOR indexes.Each one of these indexes have positives and negatives that we can get into at a later date, but know for now that each index is commonly used in this product depending on the lender chosen.
The Margin for these loans is determined by several factors including credit rating, the processing style of the loan full doc, stated income, no doc, etc.,the LTV (loan to value = how much of your home is financed as a % of its total overall value as determined by an appraiser), etc.
After analyzing Tom and Julies scenario above it becomes clear that there are certain individuals who may clearly benefit from the pay option mortgage loan when utilized in a responsible manner.Hopefully at this point, some of the distinct advantages and disadvantages to thepayment option mortgage program have become apparent.
There are certain scenarios when the payment option mortgage becomes an invaluable tool for certain borrowers.Typically these programs work well for people that share some of the following characteristics:
Those that have fluctuating incomes/cash flow such as:
self employed
school teachers
seasonal workers
salespeople
Those that have a significant amount of equity in their homes
Those that need short term payment relief due to the unexpected
Those who would like to pay off credit card/consumer debt.
Those that are newly self employed and anticipating that their incomewillcontinue to rise
Real estate investors who want to have the option to minimize their payments if necessary.
Those who are expecting a big job promotion in the near future
Those who are expecting a family inheritance
Those that are looking to relocate/move within a short period of time
Those that live in an area with rapidly escalating property values
Those who wish to divert cash flow into interest earning investment vehicles as part of their financial planning strategy.
Those who value maximum mortgage payment flexibility on a month to month basis
Just as there is no one size fits all mortgage program or perfect loan for every single borrower, there is also no perfect payment option mortgage program for every borrower as well.
Furthermore, if the borrowers sole intention is to pay off their loan as quickly as possible then that person may likely benefit more from a traditional 10 or 15 year fixed rate mortgage.
Unless a borrower wants or needs to have maximum payment flexibility available to them on a month to month basis and sees the opportunity value presented to them in doing so they would most likely be better served by a traditional fixed rate or adjustable rate mortgage.
It is very important to note that there are many different variations of this mortgage program that do not necessarily mirror Tom and Julies scenario listed above.For example, there are variations that offer a fixed pay rate for a predetermined period of time.In addition, the fully indexed rate will depend upon the corresponding index that the particular loan program is tied to.Some indexes are known and revered for their stability, while other indexes tend to fluctuate with greater frequency.The Index is a matter of personal preference and is chosen based upon many different factors.
Also of importance to note is that most payment option home loans cap the minimum payment option at 110% or 115% of the original loan amount thus reducing any risk that the borrower would wind up owing more than their property is worth. (also known as being upside down on a mortgage)Couple this with the fact that most lenders will not lend above 8090% of the appraised value for the payment option loan and it becomes obvious that risk of owing more than the property is worth is greatly minimized.
We hope that the examples listed above were able to shed light on the mystery that seems to surround the payment option mortgage.
As with any large financing decision, it is critical to understand the mechanics that will ultimately dictate ones monthly payments and financial future.
There is no doubt that it takes a little bit of time and effort to understand how this loan program works.If someone does not wish to take the time to understand how the payment option mortgage program works or cannot grasp how the payment option mortgage program works after taking time to try to understand it then chances are good that it may not be the right mortgage program for them.
At the same time, if anyone were to tell a borrower that the payment option loan program is the only loan program that is right for them without taking the necessary time to understand and assess their financial background, objectives, goals and overall situation theyd be much better served to seek out the assistance of someone who is interested in spending the necessary time with them to do so.
When utilized properly and in a responsible manner, the payment option mortgage program can be an excellent financial tool.One that offers a very unique set of benefits not found with any other loan program designed to help a homeowner manage their finances.That being said, it is absolutely critical that the borrower understand all aspects of the payment option mortgage loan prior to making a decision about what mortgage loan is truly best for them.
If you have additional questions about the payment option mortgage program, please click here:info@worldlinkfunding.com
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