A conventional loan is any mortgage loan that is not backed or insured by the federal government. With this type of loan, the underlying terms and conditions must follow the rules and regulations of Fannie Mae and Freddie Mac. These two Government Sponsored Enterprises were created to provide stability, affordability, and liquidity to the housing market.
About 35 to 50 percent of the mortgages being paid on today are conventional loans. The loan limits for most counties are for $417,000 and below. If you are I what is considered a high cost are the loan limits might reach as high as $625,500. To check for your county loan limit, use the look up tool.
As the name implies, fixed-rate mortgages have an interest level that does not change for the life of the loan. The result is a very predictable payment every month that is based on the interest rates at the time the loan was borrowed. So that means there are no surprises or hidden charges, making this type of loan perfect for someone who plans to live in the home for a long period of time. The 30 year fixed rate is often based off the movements on the secondary markets and is best tracked by following the Ten Year treasury markets.
30 year fixed: 30 year fixed-rate mortgages are very popular in the housing market now. This is due to the fact that the interest will never increase and monthly payments will be more stable over the life of the loan. A 15 or 20 year mortgage will help get the home paid off at a faster rate as well as build equity, making this a great option for purchase or refinancing.
20 year fixed: The interest rate for a 20 year fixed mortgage is often .125% lower than a 30 year fixed, with slightly better lender credit, which can help pay more of the closing cost.
First Meridian Mortgage Corporation often uses the 20 year term for a client doing a refinance of a 30 year and has paid on the loan for a few years. With the combination of a lower interest rate and a refinance, we can lock into a 20 year versus returning back to a 30 year.
15 year fixed: A 15 year fixed mortgage can be a great way to become debt free within a shorter period of time. This is the best loan for those that can afford it.
The interest rate is lower than the 30 year, typically by about .75%. The payments are highest on this loan as you are paying more towards the principal each month. The bulk of the saving is from merely paying off the loan in half the time. This is the million dollar phrase- Term is a function of what you pay to principal only.
How Does an Adjustable Rate Mortgage (ARM) Work?
An ARM can be fixed for a period of time and then will adjust after the initial fixed period is over. There are all different types of arms. Monthly, 3/1, 5/1, 5/5, 7/1 and 10/1’s are the typical offerings. The more frequent the rate adjustments, the lower the initial rate. Here are some more common arms.
1-Year Adjustable Rate Mortgage
This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 12 months on the anniversary of your loan. This has more risk as the rate will change yearly, good or bad.
3-Year Adjustable Rate Mortgage
This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 3 years. This loan, while risky, is safer than the 1-Year Adjustable Rate Mortgage because it has fewer adjustments, but could get stuck at a higher rate if rates dropped after only one year of increases. You would have to wait for 2 more years for it to decrease.
5-Year Adjustable Rate Mortgage
This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 5 years. This loan is a nice compromise between shorter term Adjustable Rate Mortgages and Fixed Rate programs, but could get stuck at a higher rate if rates dropped after only one year of increases. You would have to wait for 4 more years for it to decrease.
3/1 Adjustable Rate Mortgage
This 30-year loan offers a fixed interest rate for the first 3 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 27 years of the loan. Best to refinance at no cost at the 2 year mark with another 3/1 year or 5/1.
5/1 Adjustable Rate Mortgage
This 30-year loan offers a fixed interest rate for the first 5 years, and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 25 years of the loan. Best to look at the arm as a declining Arm. Once you have had it for 2 years you essentially only have a 3/1 left. At that point you have to start analyzing if a 3/1, 5/1 or 7/1 could make sense to refinance too with no closing cost.
7/1 Adjustable Rate Mortgage
This 30-year loan offers a fixed interest rate for the first 7 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 23 years of the loan. Good products if you think you know your time lines. But analyze the optionality cost of the extra 2 years vs the 5/1.
10/1 Adjustable Rate Mortgage
This 30-year loan offers a fixed interest rate for the first 10 years and then turns into a 1-Year Adjustable Rate Mortgage for the remaining 20 years of the loan. Good products if you think you know your time lines. But analyze the optionality cost of the extra 5 years vs the 5/1 or 3 years vs the 7/1 arm.
Time is on your side as most teaser rates have always been lower than a fixed rate. At first meridian mortgage we have been originating No Closing Cost refinances on Arms since 1996. We have had many clients do multiple refinance from one arm to another always looking at the rate vs cost, and cost vs time.
Three Major Components of ARM’s
1. Index – The index is the adjustable part of the arm and fluctuates with the market. Examples would be the 1-Year U.S. Treasury Bill., or the one year libor index. These are monitored and then published for use by the entity publishing the index.
2. Margin – the margin stays fixed for the life of the loan and is often the floor or the lowest the interest rate can go down to. This can be usually thought of as the profit for the bank.
3. Caps – the arm will have adjustment caps that distinguish how much the interest rate can adjust and when. It also establishes the highest interest rate possible for the life of the loan.
- Caps are usually stated in the following manner 2/2/5 or 5/2/5
- The first number is how much the interest rate can adjust the first adjustment.
- The second number is how much the interest rate can adjust per year on each adjustment.
- The third number is how much the interest rate can adjust over the life of the loan or the maximum possible interest rate.
Equation: index + margin = fully indexed rate.
When the initial fixed period is over, the interest rate will adjust based on the above formula. They will then apply the caps accordingly to see where the interest rate will be adjusted to.
Ex. 1 Current rate 3.00% on 5 /1 with 2/2/5 caps, 2,75 margin.
Index on 1 Year Libor Index .766 + 2.75 = 3.566
Current rate was 3.00% so you would adjust to 3.625 which is the nearest 1/8 of a percent rounded up.
Ex. 2 Current rate 3.00% on 5 /1 with 2/2/5 caps, 2,75 margin.
Index on 1 Year Libor Index 2.5% + 2.75% = 5.25%
In this is scenario the adjust fully index rate would be higher than the allowable adjusted rate with the cap. Ex. 3.00% + 2.00% cap = 5.00 The interest rate would adjust to 5.00 due to the caps, rather than 5.25% Fully Indexed Rate.
Adjustable-Rate Mortgage – Also called “Hybrid ARM” or “Fixed – Period Arm”
An adjustable rate mortgage uses the exact opposite philosophy when it comes to interest. The initial interest rate (often called a teaser rate) on this type of loan is typically lower than a fixed rate mortgage, but that rate is not locked in for the life of the loan.
What is HARP?
HARP stand for Home Affordable Refinance Program, which is a federally run program that is designed to help homeowners refinance their current loans to more affordable, stable mortgage rates. This program is used to help struggling homeowners lower their interest rates, decrease the length of their loan, and secure a lower fixed monthly payment. It was designed to refinance homeowners that were upside down on their mortgage.
If a loan was originated with no mortgage insurance or with mortgage insurance, the new loan will have the same level as the original loan. The program can only be used once and currently is slated to end 12/31/2015. These are often originated with no appraisal and often with loan to values that exceed 100%. Many of these loans can be originated with no closing cost. If you are upside down and do not take advantage of this program by the end of 2015, you might not be able to refinance until you have reestablished equity in your home.
At First Meridian Mortgage Corporation, offer conventional home loans for homeowners throughout the Washington DC., Maryland and Virginia area. If you would like to speak with an associate to decide what the best mortgage option is for you, call us today at 703-799-5626!
The basic eligibility requirements for HARP include:
- You must be current on your mortgage with no 30 day late payments within the last six months and no more than one within the past 12 months.
- Your home must be your primary residence, a one unit second home or a 1-4 unit investment property
- Your loan must be owned by Freddie Mac or Fannie Mae. You may use the tools below to check.
- Your loan must have been originated on or before May 31, 2009. You may use the tools below to check what date your loan was originated on.
- Your LTV ratio must be greater than 80%
The expiration date for HARP is 12/31/2016.