Podcast
Questions and Answers
What is a defining feature of fixed-rate mortgages?
What is a defining feature of fixed-rate mortgages?
- The interest rate and monthly payment remain constant for the entire loan term. (correct)
- The interest rate varies significantly after the first year.
- Payments are made bi-weekly to reduce the payoff time.
- The loan can be paid off immediately without penalties.
Which of the following is NOT typically a feature of 30-year fixed-rate mortgages?
Which of the following is NOT typically a feature of 30-year fixed-rate mortgages?
- They are commonly used for residential property purchases.
- Interest rates increase substantially each year. (correct)
- They are fully amortizing loans.
- Monthly payments remain consistent throughout the term.
How does making a larger down payment affect monthly payments?
How does making a larger down payment affect monthly payments?
- It eliminates the need for an escrow account for taxes and insurance. (correct)
- It typically increases monthly payments due to a lower loan amount.
- It requires Private Mortgage Insurance (PMI) regardless of the loan type.
- It results in lower monthly payments due to the reduced loan amount. (correct)
What advantage do shorter-term fixed-rate loans have compared to longer terms?
What advantage do shorter-term fixed-rate loans have compared to longer terms?
What does PMI stand for, and when is it not required?
What does PMI stand for, and when is it not required?
What is the primary characteristic of Adjustable Rate Mortgages (ARMs)?
What is the primary characteristic of Adjustable Rate Mortgages (ARMs)?
How many payments do bi-weekly fixed-rate mortgages typically result in per year?
How many payments do bi-weekly fixed-rate mortgages typically result in per year?
Which of the following can help reduce the FHA MIP?
Which of the following can help reduce the FHA MIP?
What does the initial rate of an ARM primarily affect?
What does the initial rate of an ARM primarily affect?
Which of the following is NOT considered a cap in an ARM?
Which of the following is NOT considered a cap in an ARM?
What does the term 'fully indexed rate' refer to?
What does the term 'fully indexed rate' refer to?
In an ARM, what is the purpose of a margin?
In an ARM, what is the purpose of a margin?
Which CAP structure indicates a 2% increase at each change and a maximum of 6% over the life of the loan?
Which CAP structure indicates a 2% increase at each change and a maximum of 6% over the life of the loan?
What is typically true of hybrid adjustable rate mortgages?
What is typically true of hybrid adjustable rate mortgages?
Which of the following correctly describes a 7/1 ARM?
Which of the following correctly describes a 7/1 ARM?
What must lenders provide to consumers under RESPA and TILA when they apply for an ARM?
What must lenders provide to consumers under RESPA and TILA when they apply for an ARM?
When must servicers notify borrowers of the first interest rate change on an ARM?
When must servicers notify borrowers of the first interest rate change on an ARM?
Which of the following items is NOT included in the required ARM disclosures?
Which of the following items is NOT included in the required ARM disclosures?
What do the terms '5/2/5' caps indicate for a hybrid ARM?
What do the terms '5/2/5' caps indicate for a hybrid ARM?
What does the Loan Estimate contain for an ARM?
What does the Loan Estimate contain for an ARM?
How are payments recalculated when the interest rate of an ARM changes?
How are payments recalculated when the interest rate of an ARM changes?
In which scenario is a lender NOT required to issue a notification of a rate adjustment?
In which scenario is a lender NOT required to issue a notification of a rate adjustment?
Flashcards
Fixed-Rate Mortgage
Fixed-Rate Mortgage
A mortgage where the interest rate stays the same for the entire loan term. Each payment reduces the principal, and the monthly payment remains constant.
30-Year Fixed-Rate Mortgage
30-Year Fixed-Rate Mortgage
The most common mortgage type, offering predictable monthly payments for a long term.
Shorter-Term Fixed-Rate Mortgage
Shorter-Term Fixed-Rate Mortgage
A fixed-rate mortgage with a term less than 30 years, resulting in less interest paid overall.
Bi-Weekly Fixed-Rate Mortgage
Bi-Weekly Fixed-Rate Mortgage
A fixed-rate mortgage with payments made every two weeks instead of monthly. This results in more frequent payments and faster loan payoff.
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Large Down Payment Benefit
Large Down Payment Benefit
A larger down payment reduces the loan amount, leading to lower monthly payments and less interest over the loan's lifespan.
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Lower Loan-to-Value (LTV) Ratio
Lower Loan-to-Value (LTV) Ratio
When a borrower puts a larger down payment, the LTV is lower, which can result in better loan terms from the lender.
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Adjustable Rate Mortgage (ARM)
Adjustable Rate Mortgage (ARM)
A mortgage where the interest rate can change throughout the loan term, typically resetting periodically based on a specific index.
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ARM Initial Interest Rate
ARM Initial Interest Rate
The interest rate on an ARM remains fixed for a predetermined period before it starts adjusting based on the agreed-upon terms.
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Initial Rate
Initial Rate
The starting interest rate on an adjustable-rate mortgage (ARM). It can be lower than the fully indexed rate to attract borrowers.
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Index
Index
A publicly available benchmark used to determine future interest rate adjustments on an ARM. Examples include Treasury bills, LIBOR, and SOFR.
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Margin
Margin
The additional amount added to the index to calculate the new interest rate on an ARM. It's fixed for the life of the loan.
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Caps
Caps
Limits on how much the interest rate can change on an ARM. They protect borrowers from sudden and large increases.
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Per Change Cap
Per Change Cap
A cap that restricts the maximum increase allowed for each adjustment period on an ARM.
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Maximum of Life Cap
Maximum of Life Cap
A cap that sets the maximum interest rate allowed for the entire life of an ARM.
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Fully Indexed Rate
Fully Indexed Rate
The interest rate calculated by adding the margin to the index on an ARM.
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Start Rate
Start Rate
An initial rate offered on an ARM that's lower than the fully indexed rate.
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Teaser Rate
Teaser Rate
Another term for the start rate, a lower initial rate offered on an ARM.
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Hybrid ARM
Hybrid ARM
A mortgage with a fixed rate for a predetermined period, then converts to an adjustable rate following the loan terms.
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Adjustment Date
Adjustment Date
The date when the interest rate on an ARM is recalculated based on the index and margin.
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1/1 ARM
1/1 ARM
An adjustable-rate mortgage with a one-year adjustment period. No initial fixed-rate period.
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10/6 Month ARM
10/6 Month ARM
An ARM with a fixed rate for 10 years, then adjusts every six months.
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7/1 ARM
7/1 ARM
An ARM with a seven-year fixed rate period, followed by annual adjustments.
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CHARM Booklet
CHARM Booklet
The Consumer Handbook on Adjustable Rate Mortgages, a resource for borrowers understanding ARM terms.
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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."
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