Mortgage Loan Products: Fixed Rate Basics

Mortgage Loan Products: Fixed Rate

• Fixed-Rate Mortgages: Common type for purchasing or refinancing. Interest rate remains constant. Fully amortizing loans—principal decreases with each payment. Loan amount is fully repaid by the end of the term.
• Terms: Range from 10 to 30 years; 30-year fixed-rate mortgages are most prevalent for home purchases. Shorter terms result in less interest paid, but rates are typically lower.
• Bi-Weekly Payments: Some lenders offer bi-weekly fixed-rate mortgages (13 payments/year) leading to faster payoff (22-26 years). Traditional borrowers can achieve early payoff by making 13 payments per year or adding extra to monthly payments.
• Down Payment Impact: Larger down payments lead to lower monthly payments and less interest paid. Lower loan-to-value ratio decreases lender risk and can result in better pricing (from lender, or Fannie Mae/Freddie Mac adjustments).
• PMI & MIP: PMI (Private Mortgage Insurance) isn't needed with 20% down payments on conventional loans. FHA MIP (Mortgage Insurance Premium) can be reduced with larger down payments. VA Funding Fee is also reducible with down payment.
• Escrow Waivers: Monthly escrow for taxes and insurance can be waived on conventional loans with 20% or higher down-payment.

Mortgage Loan Products: Adjustable Rate Mortgages (ARMs)

• Adjustable Rate Mortgages (ARMs): Interest rate changes throughout the loan term.
• Key Components of ARMs:
  • Initial Rate: Set for a period.
  • Index: Public benchmark (e.g., one-year Treasury bills, 11th District Cost of Funds index, LIBOR, or SOFR).
  • Margin: Amount added to index to determine rate.
  • Caps: Limits on interest rate changes.
    • Per change cap: Limits increases per adjustment.
    • Lifetime cap: Maximum possible increase over entire loan term.
    • Example: 2/6 caps mean 2% increase per adjustment, maximum of 6% over initial rate.
• Fully Indexed Rate: Index + Margin. Initial rates might be lower than fully indexed rate; these are "start rates" or "teaser" rates.
• Hybrid ARMs: Have a fixed rate period, then transition to variable rate.
  • Change structure is used to describe hybrid ARMs: 1/1 = (no initial rate), 10/6 = 10-year fixed, adjusts every six months, etc.
• Consumer Protections (RESPA, TILA, RegZ):
  • Consumer Handbook: Required within 3 days of application for ARM loan.
  • Program Disclosure: Needed for every variable-rate loan type the consumer is interested in; includes rate/payment/term changes, how interest rate is determined, index adjustments, margin, rate discounts, changes/limitations of index/payment/loan balance, negative amortization, rate carryover, demand features, frequency of changes, examples, calculations, statements about other variable-rate plans.
• Loan Estimate (LE):
  • Indicates if the plan is an ARM, payment changes due to interest changes, projected payments.
  • Adjustable Interest Rate (AIR) Table details: index, margin, caps, change frequency/timing.
• Notification Requirements: Lender/servicer must notify borrower for rate changes at least 210 days before the first adjusted payment. Notifications are required for all adjustments that impact the payment amount, at least 60 days before.
• Exceptions to Notification: No notification needed for: one-year or shorter ARM terms, adjustments causing first payment due less than 210 days after closing, or if borrower has issued a "cease communication order."

Explore the essentials of fixed-rate mortgages, including terms, payment options, and down payment impacts. Understand how these loans function and the benefits of bi-weekly payments. This quiz is perfect for anyone looking to deepen their knowledge about mortgage products.