With most Adjustable Rate Mortgages (ARM), the interest rate and monthly payment are fixed for an initial time period such as one year, three years, five years, or seven years. After the initial fixed period, the interest rate can change periodically (e.g., yearly). For example, a popular adjustable rate mortgages is the five-year ARM. The interest rate will not change for the first five years (the initial adjustment period) but can change every year after the first five years.
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Frequently Asked Questions
The homebuying process is complex. It is an exciting time, but can also be stressful. The more you know, the more comfortable you will be. Let us help guide you.
How are interest rates determined?
Interest rates fluctuate based on a variety of factors, including inflation, the pace of economic growth, and Federal Reserve policy. Over time, inflation has the largest influence on the level of interest rates. A modest rate of inflation will almost always lead to low interest rates, while concerns about rising inflation normally cause interest rates to increase. Our nation’s central bank, the Federal Reserve, implements policies designed to keep inflation and interest rates relatively low and stable.
What is an adjustable rate mortgage?
Our ARM interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indices is published weekly in the Wall Street Journal. If the index rate moves up so does your mortgage interest rate, and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down your monthly payment may decrease.
To determine the interest rate on an ARM, we’ll add a pre-disclosed amount to the index called the “margin.” If you’re still shopping, comparing one lender’s margin to another’s can be just as important as comparing the initial interest rate, since it will be used to calculate the interest rate you will pay in the future.
An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:
- Periodic or adjustment caps, which limit the interest rate increase or decrease from one adjustment period to the next.
- Overall, or lifetime caps, which limit the interest rate increase or decrease over the life of the loan.
As you can imagine, interest rate caps are very important since no one knows what can happen in the future. All of the ARMs we offer have both adjustment and lifetime caps. Please see each product description for full details.
“Negative Amortization” occurs when your monthly payment changes to an amount less than the amount required to pay interest due. The remaining amount of interest owes is added to the loan’s principal balance, which ultimately causes you to owe more money. None of the ARMs we offer allow for negative amortization.
Some lenders may require you to pay special fees or penalties if you pay off the ARM early. We never charge a penalty for prepayment.
Should I pay discount points in exchange for a lower interest rate?
Paying discount points is also called “buying down the rate.” Each point is equal to one percent of the loan amount. You pay them up front at your loan closing in exchange for a lower interest rate over the life of your loan. To determine whether it makes sense for you to pay discount points, you should compare the cost of the discount points to the monthly payments savings created by the lower interest rate. Divide the total cost of the discount points by the savings in each monthly payment. This calculation provides the number of payments you’ll make before you actually begin to save money by paying discount points. If the number of months it will take to recoup the discount points is longer than you plan on having this mortgage, you should consider the loan program option that doesn’t require discount points to be paid.
Is comparing APRs the best way to decide which lender has the lowest rates and fees?
The Federal Truth in Lending law requires that all financial institutions disclose the Annual Percentage Rate (APR) when they advertise a rate. The APR is designed to present the actual cost of obtaining financing by requiring that some, but not all, closing fees are included in the APR calculation. In addition to the interest rate, these fees determine the estimated cost of financing over the full term of the loan.
You can use the APR as a guideline to shop for loans but you should not depend solely on the APR in choosing the loan program that’s best for you. Look at total fees, possible rate adjustments in the future if you’re comparing adjustable rate mortgages, and consider the length of time that you plan on having the mortgage.
Don’t forget that the APR is an effective interest rate–not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow, and the term of your loan.
How do I know if it's best to lock in my interest rate or let it float?
Mortgage interest rate movements are as hard to predict as the stock market and no one can really know for certain whether they’ll go up or down. If you have a hunch that rates are on an upward trend, you’ll want to consider locking the rate as soon as you are able. Before you decide to lock, make sure that your loan can close within the lock-in period. It won’t do any good to lock your rate if you can’t close during the rate lock period. If you’re purchasing a home, review your contract for the estimated closing date to help you choose the right rate lock period. If you are refinancing, in most cases, your loan could close within 45 days.
If you think rates might drop while your loan is being processed, you could take a risk and let your rate “float” instead of locking. After you apply, you can lock in by contacting your Mortgage Lender by telephone.
How much money will I save by choosing a 15-year loan rather than a 30-year loan?
A 15-year fixed rate mortgage gives you the ability to own your home free and clear in 15 years. While the monthly payments are higher than a 30-year loan, the interest rate on the 15-year mortgage is usually a little lower. You’ll pay less interest than the traditional 30-year mortgage.
Are there prepayment penalties?
None of the loan programs we offer have penalties for prepayment. You can pay off your mortgage any time with no additional charges.
Tell me more about closing fees and how they are determined.
A home loan often involves many fees, such as the appraisal fees, title charges, closing fees, and state or local taxes. These fees vary from state to state and also from lender to lender. We take quotes very seriously. We’ve completed the research necessary to make sure that our fee quotes are accurate – and that is no easy task!
To assist you in evaluating our fees, we’ve grouped them as follows:
Third Party Fees
Some fees that we consider third party fees include appraisal fee, credit report fee, settlement or closing fee, survey fee, tax service fees, title insurance fees, flood certification fees, and courier/mailing fees. Third party fees are fees that we’ll collect and pass on to the person who actually performed the service. For example, an appraiser is paid the appraisal fee and a title company or an attorney is paid the title insurance fees.
Fees such as discount points, document preparation fees, origination fees and loan processing fees are retained by the lender. This is the category of fees that you should compare very closely from lender to lender before making a decision.
You may be asked to prepay some items at closing that will actually be due in the future. These fees are sometimes referred to as prepaid items. One of the more common required advances is called “per diem interest” or “interest due at closing.” All of our mortgages have payment due dates set to the first of the month. If your loan is closed on any day other than the first of the month, you’ll pay interest from the date of closing through the end of the month, at closing.
For example, if the loan is closed on June 15, we’ll collect interest from June 15 through June 30 at closing. This also means that you won’t make your first mortgage payment until August 1. If an escrow or impound account will be established, you will make an initial deposit into the escrow account at closing so that sufficient funds are available to pay the bills when they become due.
If your loan requires mortgage insurance, up to two months of the mortgage insurance will be collected at closing. Whether or not you must purchase mortgage insurance depends on the size of the down payment you make.
If your loan is a purchase, you’d pay for your first year’s homeowner’s insurance premium at closing.
What is title insurance and why do I need it?
The purchase of a home is most likely one of the most expensive and important purchases you will ever make. You, and your mortgage lender, want to make sure the property is indeed yours: That no individual or government entity has any right, lien, claim, or encumbrance on your property.
The function of a title insurance company is to make sure your rights and interests to the property are clear, that transfer of title takes place efficiently and correctly, and that your interests as a homebuyer are fully protected.
Title insurance companies provide services to buyers, sellers, real estate developers, builders, mortgage lenders, and others who have an interest in real estate transfer. Title companies typically issue two types of title policies:
- Owner’s Policy. This policy covers you, the homebuyer.
- Lender’s Policy. This policy covers the lending institution over the life of the loan.
Both types of policies are issued at the time of closing for a one-time premium, if the loan is a purchase. If you are refinancing your home, you probably already have an owner’s policy that was issued when you purchased the property, so we’ll only require that a lender’s policy be issued.
Before issuing a policy, the title company performs an in-depth search of the public records to determine if anyone other than you has an interest in the property. The search may be performed by title company personnel using either public records or, more likely, the information contained in the company’s own title plant.
After a thorough examination of the records, any title problems are usually found and can be cleared up prior to your purchase of the property. Once a title policy is issued, if any claim covered under your policy is ever filed against your property, the title company will pay the legal fees involved in the defense of your rights. They are also responsible to cover losses arising from a valid claim. This protection remains in effect as long as you or your heirs own the property.
The fact that title companies try to eliminate risks before they develop makes title insurance significantly different from other types of insurance. Most forms of insurance assume risks by providing financial protection through a pooling of risks for losses arising from an unforeseen future event, say a fire, accident or theft. On the other hand, the purpose of title insurance is to eliminate risks and prevent losses caused by defects in title that may have happened in the past.
This risk elimination has benefits to both the homebuyer and the title company. It minimizes the chances that adverse claims might be raised, thereby reducing the number of claims that have to be defended or satisfied. This keeps costs down for the title company and the premiums low for the homebuyer.
Buying a home is a big step emotionally and financially. With title insurance you are assured that any valid claim against your property will be borne by the title company, and that the odds of a claim being filed are slim indeed.
What is mortgage insurance and when is it required?
First of all, let’s make sure that we mean the same thing when we discuss “mortgage insurance.” Mortgage insurance should not be confused with mortgage life insurance or home owner’s insurance. Mortgage insurance makes it possible for you to buy a home with less than a 20% down payment by protecting the lender against the additional risk associated with low down payment lending. Low down payment mortgages are becoming more and more popular, and by purchasing mortgage insurance, lenders are comfortable with down payments as low as 3 – 5% of the home’s value. It also provides you with the ability to buy a more expensive home than might be possible if a 20% down payment were required.
The mortgage insurance premium is based on loan to value ratio, type of loan, and amount of coverage required by the lender. Usually, the premium is included in your monthly payment and one to two months of the premium is collected as a required advance at closing.
It may be possible to cancel private mortgage insurance at some point, such as when your loan balance is reduced to a certain amount – below 75% to 80% of the property value. Federal Legislation requires automatic termination of mortgage insurance for many borrowers when their loan balance has been amortized down to 78% of the original property value. If you have any questions about when your mortgage insurance could be cancelled, please contact your Loan Advisor.
What is the maximum percentage of my home's value that I can borrow?
The maximum percentage of your home’s value depends on the purpose of your loan, how you use the property, and the loan type you choose, so the best way to determine what loan amount we can offer is to complete our online application!