More about Adjustable Rate Mortgages
Why is an appraisal required?
An appraisal is an estimate of the value of a property. An estimate of the value
of the property generally refers to its fair market value. The purpose and use of
appraisals include transfer of ownership, financing and credit, taxation, condemnation,
insurance and many others. An appraiser is typically a state-licensed individual
trained to render expert opinions concerning property values. Authorized by Congress,
The Appraisal Foundation sets minimum standards for licensed appraisers. The Foundation
is the parent organization of the Appraiser Qualifications Board (AQB). States are
required to implement appraiser certification requirements which are at least as
rigorous as those issued by the AQB.Certified General Appraiser and Certified Residential
The AQB has issued criteria for the Certified General Appraiser and Certified Residential
Appraiser. Each has education, experience, examination and continuing education
requirements. Consider working with either a Certified General or Certified Residential
Appraiser. The appraiser considers three approaches to value when arriving at an
opinion: sales comparison approach (formerly the market data comparison approach),
cost approach and income capitalization approach. When evaluating single-family,
owner-occupied properties, the sales comparison approach is most heavily weighted
by an appraiser. This approach compares the subject property with other similar
properties in the vicinity which have sold or are for sale. Real estate professionals
also rely heavily on this approach.
Real estate agents approximate the appraisal process by conducting a Comparative
Market Analysis (CMA), using the sales comparison approach to value. The accuracy
of the agent's appraisal depends on the experience and skill of the agent. The CMA
is not an officially recognized appraisal.
Most lenders will not lend money without an acceptable appraisal. You can be sure
you are getting an expert appraisal when the appraiser is licensed or certified
and is governed by the Competency Provision of the Code of Ethics of the Uniform
Standards of Professional Appraisal Practice (USPAP), proclaimed by the Appraisal
Most appraisers use three approaches to establish the value of a property. The Sales
Comparison Approach is normally considered to be the best indication of value for
Sales Comparison Approach: In this approach the appraiser finds three to four comparable
properties in the neighborhood which have recently sold. Ideally, these properties
are within a one-half mile radius of the subject property and have sold within the
last six months. The appraiser compares the sold properties to the subject property.
The factors used in the comparison include square footage, number of bedrooms and
bathrooms, property age, lot size, view, and property condition.
Cost approach: This approach considers the value of the land, assumed vacant, added
to the cost to reconstruct the appraised building as new on the date of value, less
the accrued depreciation the building suffers in comparison with a new building.
Income capitalization approach: In this approach the potential net income of the
property is capitalized to arrive at a property value. This approach is suited to
income-producing properties and is usually used in conjunction with other valuation
methods. The process of converting a future income stream into a present value is
known as capitalization
How much does an appraisal cost?
The cost of an appraisal varies based upon the:
Type of appraisal: The most commonly used appraisal is called the Uniform Residential
Appraisal Report (URAR). Some lenders may accept an abbreviated appraisal called
the "Drive By Appraisal", which costs less than the URAR.
Type of property: Appraisals for single-family homes and condominiums usually cost
less than appraisals for multi-unit properties.
Value of property: Appraisals for higher-priced homes usually cost more than appraisals
for lower-priced homes. If your home value is over $500,000, you can expect to pay
more for your appraisal.
Location of property: The cost of an appraisal is affected by geographic location
and availability of appraisers. In areas where appraisers are few, or the properties
are hard to access, appraisal costs increase.
Use of property: Appraisals for income-producing properties, for example, usually
cost more than appraisals for non-income-producing properties. Rental property appraisals
include a rent survey and the property's income statement. Appraisal fees on single-family,
owner-occupied homes under $500,000 in densely populated areas vary between $250
and $400. Fees for similarly priced rental properties may vary between $400 and
Credit Reporting Agencies
Three agencies accumulate data on which to base your credit history. Their names,
addresses and phone numbers are shown below. It is normally very difficult to speak
to a live person at these agencies; instead you are directed through a voice-mail
maze which will give you instructions on how to get a copy of your report, what
it may cost, or how to deal with a problem you may have. In any case, it is better
to communicate in writing. Use certified mail so you will get a receipt showing
that the agency received your letter and when they received it.
P.O. Box 105873
Atlanta GA 30348
(800) 685 1111
EXPERIAN (formerly TRW)
P.O. Box 8030
Layton UT 84041-8030
(800) 520 1221
(800) 682 7654
P.O. Box 390
Springfield PA 19064
(800) 961 8800
(800) 851 2674
You see the advertisements in newspapers, on TV, and on the Internet. You hear them
on the radio. You get fliers in the mail. You may even get calls from telemarketers
offering credit repair services. They all make the same claims:
"Credit problems? No problem!"
"We can erase your bad credit -- 100% guaranteed."
"Create a new credit identity legally."
"We can remove bankruptcies, judgments, liens, and bad loans from your credit file
Do yourself a favor and save some money, too. Don't believe these statements. Only
time, effort, and a personal debt repayment plan will improve your credit report.
This document explains how you can improve your credit-worthiness and lists legitimate
resources for low- or no-cost help.
Everyday, companies nationwide appeal to consumers with poor credit histories. They
promise, for a fee, to clean up your credit report so you can get a car loan, a
home mortgage, insurance, or even a job. The truth is, they can't deliver. After
you pay them hundreds or thousands of dollars in up-front fees, these companies
do nothing to improve your credit report; many simply vanish with your money.
The Warning Signs
If you decide to respond to a credit repair offer, beware of companies that:
Want you to pay for credit repair services before any services are provided;
Do not tell you your legal rights and what you can do yourself for free;
Recommend that you not contact a credit bureau directly;
Suggest that you try to invent a "new" credit report by applying for an Employer
Identification Number to use instead of your Social Security Number;
Advise you to dispute all information in your credit report or take any action that
seems illegal, such as creating a new credit identity. If you follow illegal advice
and commit fraud, you may be subject to prosecution.
If you provide false information while using the mail or telephone to apply for
credit, you could be charged and prosecuted for mail or wire fraud. It's a federal
crime to make false statements on a loan or credit application, misrepresent your
Social Security Number, or obtain an Employer Identification Number from the Internal
Revenue Service under false pretenses.
Under the Credit Repair Organizations Act, credit repair companies cannot require
you to pay until they have completed the promised services.
No one can legally remove accurate and timely negative information from a credit
report. If you wish to dispute information contained in your credit report, the
law allows you to request a reinvestigation of the information in question. There
is no charge for this. Everything a credit repair clinic can do for you legally,
you can do for yourself at little or no cost. According to the Fair Credit Reporting
You are entitled to a free copy of your credit report if you've been denied credit,
insurance or employment within the last 60 days. If your application for credit,
insurance, or employment is denied because of information supplied by a credit bureau,
the company you applied to must provide you with that credit bureau's name, address,
and telephone number.
You can dispute mistakes or outdated items for free. Ask the credit reporting agency
for a dispute form or submit your dispute in writing, along with any supporting
documentation. Do not send them original documents.
Clearly identify each item in your report that you dispute, explain why you dispute
the information, and request a reinvestigation. If the new investigation reveals
an error, you may ask that a corrected version of the report be sent to anyone who
received your report within the past six months. Job applicants can have corrected
reports sent to anyone who received a report for employment purposes during the
past two years.
When the reinvestigation is complete, the credit bureau must give you the written
results and a free copy of your report if the dispute results in a change. If an
item is changed or removed, the credit bureau cannot put the disputed information
back in your file unless the information provider verifies its accuracy and completeness,
and the credit bureau gives you a written notice that includes the name, address,
and phone number of the provider.
You also should tell the creditor or other information provider in writing that
you dispute an item. Many providers specify an address for disputes. If the provider
then reports the item to any credit bureau, it must include a notice of your dispute.
In addition, if you are correct, that is, if the information is inaccurate, the
information provider may not use it again.
If the reinvestigation does not resolve your dispute, have the credit bureau include
your version of the dispute in your file and in future reports. Remember, there
is no charge for a reinvestigation.
Reporting Negative Information
Accurate negative information generally can be reported for seven years, but there
Bankruptcy information can be reported for 10 years;
Information reported because of an application for a job with a salary of more than
$75,000 has no time limitation;
Information reported because of an application for more than $150,000 worth of credit
or life insurance has no time limitation;
Information concerning a lawsuit or a judgment against you can be reported for seven
years or until the statute of limitations runs out, whichever is longer; and
Default information concerning U.S. Government insured or guaranteed student loans
can be reported for seven years after certain guarantor actions.
The Credit Repair Organizations Act
By law, credit repair organizations must give you a copy of the "Consumer Credit
File Rights Under State and Federal Law" before you sign a contract. They also must
give you a written contract that spells out your rights and obligations. Read these
documents before signing the contract. The law contains specific protections for
you. For example, a credit repair company cannot:
make false claims about their services;
charge you until they have completed the promised services;
perform any services until they have your signature on a written contract and have
completed a three-day waiting period. During this time, you can cancel the contract
without paying any fees.
Your contract must specify:
the payment terms for services, including their total cost;
a detailed description of the services to be performed;
how long it will take to achieve the results;
any guarantees they offer;
the company's name and business address.
Have You Been Victimized?
Many states have laws strictly regulating credit repair companies. States may be
helpful if you've lost money to credit repair scams.
If you've had a problem with a credit repair company, don't be embarrassed to report
them. While you may fear that contacting the government will only make your problems
worse, that's not true. Laws are in place to protect you. Contact your local consumer
affairs office or your state attorney general (AG). Many AGs have toll-free consumer
hotlines. Check with your local directory assistance.
For More Information
You can file a complaint with the FTC by contacting the Consumer Response Center
by phone: toll-free 1-877-FTC-HELP (382-4357); TDD: 202-326-2502; by mail: Consumer
Response Center, Federal Trade Commission, 600 Pennsylvania Ave, NW, Washington,
DC 20580; or through the Internet, using the online complaint form. Although the
Commission cannot resolve individual problems for consumers, it can act against
a company if it sees a pattern of possible law violations.
This document was written in February 1998 by the FTC.
Types of Home Equity loans
Fundamentally, there are two types of home equity loans:
Home Equity Line: When you get a home equity line, you obtain the right to draw
money, whenever you want, over a certain period of time. You only pay interest on
the amount you borrow. You may borrow, pay off and borrow again against the line
of credit. You typically access the line with a check or credit card.
Second Mortgage (home equity loan): When you get a second mortgage, you obtain a
lump sum of money. The interest rate and monthly payments are fixed.
Before deciding which type of loan you want, consider how you'll use the money.
If you need funds for a single expense, such as a room addition, remodeling, etc.,
you'll want to strongly consider a fixed-rate, second mortgage. You receive one
lump sum at the beginning of the loan term. You pay it back in equal, monthly installments.
The certainty of a fixed interest rate and equal monthly payments make the fixed-rate,
second loan very attractive. Will this type of loan be less expensive compared to
an adjustable rate, home equity line? There is no way to know with certainty. One
would have to be able to predict interest rates with accuracy. Consider one of the
reasons why adjustable rate loans were invented: to shift interest rate risk from
the lender to the borrower. When market interest rates rise above the interest rate
on your fixed-rate mortgage, the lender is effectively losing money on your mortgage
and you're getting a bargain. Lenders wanted a way to protect themselves from this
situation--thus the adjustable-rate mortgage.
If you need periodic amounts of money over time, for a child's education tuition,
for example, a home equity line may be ideal. You can borrow only the amount you
need, when you need it. These loans carry adjustable (ARM) rates, but some banks
allow you to convert a portion of your loan to a fixed-rate second. You may pay
a premium for the convenience of an equity line, including a transaction fee for
each draw and an annual fee if you draw or not.
Deciding in advance which type of loan is best for you helps when comparing the
expense of various loans. Since the APR for a fixed-rate second is calculated differently
compared to a home equity line, APR comparisons can be difficult when comparing
a fixed-rate second to a home equity line. APRs of fixed-rate seconds account for
points and other closing charges. APRs for home equity lines don't account for points
and other closing costs. When comparing the same types of loans (apples to apples),
APRs are much more meaningful.
Shopping for a Home Equity
line of credit
Is a home equity line what you need?
Before you apply for a home equity line of credit (HELOC), make sure it's the type
of loan you want. If you need relatively small amounts of money over time, such
as for school tuition, a HELOC may be right for you. If you need a lump sum for
a particular purpose, such as building a room addition, a home equity loan would
probably be better.
Carefully compare plans
Carefully compare several plans. Examine terms and conditions, annual percentage
rates (APR), annual and initial transaction (set up) costs, indices, margins and
caps. Some lenders may not charge setup or annual fees, but may charge a higher
interest rate in return.
There may be an introductory, or "teaser" rate offered. This is a temporary rate
which will have little beneficial value over the life of your loan. Since most HELOCs
are variable rate loans, the rate you pay is the sum of the index plus the margin.
Indices are expressed as rates and include Prime and T-Bill rates. The margin is
explicitly stated in your loan documents and is also expressed as a percentage.
For example, if your loan were tied to the Prime rate with a 2% margin, and the
Prime rate were 8%, you'd pay 10%. Historical information regarding the behavior
of various indices is available on-line and at your local library. A little research
will help you determine which index you'd be most comfortable with.
Your variable rate plan will identify a maximum interest rate (ceiling or cap).
Your loan may not exceed the rate cap during the life of the loan under any conditions.
Consider a loan which allows amortization--repayment in installments of principal
and interest sufficient to retire the debt by the end of the plan. Try to amortize
your loan, otherwise, you may incur a balloon payment at the end of the plan.
Under certain circumstances, depending on your program, the monthly payments may
not adjust adequately to fully account for interest rate increases. In this event,
negative amortization may occur. Negative amortization is when in which your loan
balance increases. If this condition is a possibility with your loan, discuss with
your lender how you can avoid it.
Some lenders may permit you to convert a variable rate to a fixed rate during the
life of the plan, or to convert all or a portion of your line to a fixed-term installment
Agreements generally will permit the lender to freeze or reduce your credit line
under certain circumstances. For example, some variable-rate plans may not allow
you to get additional funds during any period the interest rate reaches the cap.
Perhaps you discover you can borrow much more than you expected, or need. A HELOC
may seem to turn your home into a new type of credit card. If you default on a credit
card, you may only damage your credit. If you default on a HELOC, you could lose
With a balloon loan, at some point you'll be forced to pay off the loan, refinance
the loan, or exercise a conversion option to get a new loan on or before the balloon
due date. Unlike standard fixed or adjustable loans, balloon loans are not amortized.
The entire loan balance is all due and payable in a relatively short time.
One of the most popular balloon programs is the 30/5, commonly referred to as a
"thirty-year due in five." The interest rate is fixed and the monthly payment is
sufficient to pay off the loan in thirty years, but the outstanding principal balance
is due at the end of five years. Some 30/5s have a conversion option which allows
you to convert to a twenty-five year, fixed rate at the time the balloon becomes
due. There may be a minimal processing fee (typically $250) to convert to the new
loan. The conversion rate is normally the FNMA sixty-day rate plus .5 percent. The
conversion option may also be conditioned upon:
Satisfactory mortgage-payment history. If your payments were late, the conversion
may be denied.
If the loan was secured by an owner-occupied dwelling, the dwelling will still need
to be owner-occupied. If the house is a rental at the time of loan-conversion, the
conversion may be denied, or you might be charged a higher interest rate.
Secondary financing may not be allowed. If you have a second mortgage, the conversion
may be denied unless you pay off the second mortgage.
Terms vary by lender. More information can be found in the loan obligation (promissory
note). This is a document the lender will require you to sign at the time of closing.
Another popular balloon loan program is the 30/7. This is similar to the 30/5 except
that the balloon comes due at the end of the seventh year.
Making bi-weekly (ocurring once every two weeks) payments can shorten the life of
your mortgage and reduce your interest expense over the life of the loan. Instead
of making a full payment every month, you make a half payment every two weeks. Since
there are fifty-two weeks in a year, you make twenty-six half payments, or thirteen
full payments. As a result, you are making one extra mortgage payment per year.
Making bi-weekly payments can reduce the term on a thirty-year, fixed loan to approximately
There are several ways to implement a biweekly program:
Contact your lender. See if they offer a bi-weekly program.
Locate a company that helps borrowers make bi-weekly payments. The company will
deduct payments from your bank account every two weeks, but will only pay your lender
once per month. The disadvantage is that you loose interest on your money that you
otherwise would have made. The advantage is that it is convenient and automatic.
Be sure to fully investigate the company's credentials. There have been scams reported
in the industry.
Do it yourself. Open a bank account and make bi-weekly deposits. Each month, pay
your lender from that account. You will earn interest on the money in your account.
Make monthly pre-payments. Increase the amount you pay each month by one-twelfth
(8.33%). By increasing your mortgage payment by just over 8 percent, you shorten
the life of your loan and save money effectively the same as you would with a bi-weekly
Ask yourself some questions before committing in writing to a bi-weekly program.
Remember, any loan is potentially a bi-weekly loan. If you have the discipline to
make the extra payment per month or per year, why enter into a written agreement
or pay someone to help you? If you use a third party to help you, ask what their
set-up and monthly servicing fees are, then determine what you're really saving.
Interest Rate Buydowns (Points)
Interest rate buydowns are used to help you qualify for a larger loan and obtain
a higher priced home. Buydowns allow you to pay extra points up-front in return
for a lower interest rate for the first few years. Since the additional points you
pay are tax deductible, there are some tax benefits. People relocating due to employment
often obtain buydowns. Employers sometimes pay the extra points as part of a relocation
The most common buydown program is the 2-1 buydown. With this program the interest
rate is reduced 2 percent during the first year and 1 percent the second year. For
example, if you obtain a 2-1 buydown on a 30-year, fixed, 8 percent mortgage, the
rate is 6 percent the first year, 7 percent the second year and 8 percent thereafter.
Some companies offer a 3-2-1 buydown. This reduces your rate 3 percent the first
year, 2 percent the second year and 1 percent the third year.
There are many variations of buydown programs. Some buydown programs result in interest
rates changing every six months as opposed to every year.
An FHA loan is a mortgage loan insured by the Federal Housing Administration . FHA
is part of the U.S. Department of Housing and Urban Development (HUD). FHA insures
loans made by banks, savings and loans, mortgage companies, credit unions and other
approved institutions. FHA does not originate loans. Since 1934, FHA has offered
mortgage insurance programs which help people purchase homes with a modest down
payment. Title II, Section 203(b) is the most often used single family program.
Under this program a borrower may obtain a ten, fifteen, twenty, twenty-five or
thirty year loan to purchase an existing one- to four-family home in a rural or
In recent years, Fannie Mae and Freddie Mac have introduced low down-payment programs
also--the Community Home Buyer program for example. Consequently, FHA loans are
less popular than they once were. The loan limits for FHA loans vary geographically.
FHA requires a mortgage insurance premium (MIP) when insuring a loan. Currently,
the up-front MIP is 2.25 percent of the base loan amount, or 1.75 percent for a
qualified first-time homebuyer. The up-front MIP may be financed. In addition, there
is a monthly MIP payment which is calculated by multiplying the loan amount by .5
percent and dividing by twelve. Condominiums do not require up-front MIP--only monthly
Down Payment Gifts: One of the key benefits of an FHA program is that you do not
have to use your own funds for the down payment. Under certain conditions, gifts
are allowed if the donor is a relative, a close friend, an employer, or a humanitarian,
welfare, or charitable organization. A gift letter, signed by the donor, is required
stating the amount given and specifying that no repayment is expected, (See HUD
Handbook 4000.2 REV-2)
Bridal Registry: The Bridal Registry Account allows couples who are getting married
to open a bridal registry savings account with a participating Federal Housing Administration
approved bank. Family and friends may deposit cash wedding gifts directly into the
FHA Streamline Refinance: FHA has made it very easy for borrowers to refinance their
existing FHA loans. If your mortgage is currently FHA insured, your payments have
not been late, you are not taking cash out, and you are reducing your payment--you
may qualify for the FHA Streamline Refinance Program. An FHA Streamline Refinance
typically does not require an appraisal
203(k) loan: FHA insures rehabilitation loans for owner-occupants, municipalities
and non-profit housing providers to finance 1) rehabilitation of an existing property,
2) rehabilitation and refinancing of a property, and 3) the purchase and rehabilitation
of a property.
Investors must have a 15 percent down payment and can purchase (or refinance) and
rehabilitate properties for rental purposes or sell the property (and get their
profit using the Escrow Commitment Procedure) to a qualified Homebuyer (who assumes
203(k) can be used with one- to four-family dwellings, condominiums and HUD homes
that require a minimum of $5,000 in repairs. CO-OPS ARE NOT ELIGIBLE. Garden apartment
style row housing can be converted with 203(k) to fee simple or condominium with
the addition of fire walls every four units. 203(k) loans can be used to bring illegal
dwellings into code compliance.
Mixed use residential property is acceptable provided the property has no greater
than 25 percent for a one story building; 33 percent for a three story building;
and 49 percent for a two story building of its floor area used for commercial (storefront)
purposes. The rehabilitation funds can only be used for the residential functions
of the dwelling and areas used to access the residential part of the property.
Reverse mortgages for seniors: Homeowners sixty-two and older who have paid off
their mortgages or have only small mortgage balances remaining are eligible to participate
in HUD's reverse mortgage program. The program allows homeowners to borrow against
the equity in their homes.
Homeowners can receive payments in a lump sum, on a monthly basis, or on an occasional
basis similar to a line of credit. Under certain circumstances, homeowners may restructure
their payment options.
Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment
as long as the borrower lives in the home. The reverse mortgage is repaid in one
payment, after the death of the borrower, or when the borrower no longer occupies
the property as a principal residence. Upon sale of the home, any remaining equity
goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient
to pay the amount owed, HUD will pay the lending institution the amount of the shortfall.
The maximum amount of the reverse mortgage is determined by multiplying the maximum
claim amount by the factor corresponding to the age of the youngest borrower and
the expected rate. It is beyond the scope of this document to present the factorial
tables required to calculate your particular maximum loan amount.
Home Improvement FHA Title 1 loans: Under Title I, FHA insures loans obtained for
repairs, alterations, and improvements to existing structures, and for the building
of small new structures for nonresidential use. The property can be non-residential,
multi-family, or single-family. Interest rates on these loans are set by HUD-approved
For answers to your FHA questions, call 1-800-CALLFHA.
Fixed-rate mortgages are very popular because the interest rate and monthly payments
are constant. Fixed loans are generally amortized over ten, fifteen, twenty or thirty
A fixed-rate mortgage is generally preferred when the interest rate is relatively
low and one intends to keep the property for more than five to seven years. When
rates are relatively high, or if one intends to sell the property in fewer than
five to seven years, adjustable loans are generally preferred.
The most common fixed rate mortgage is the thirty-year fixed. Borrowers who want
to pay off their loan sooner may opt for a fifteen-year mortgage. If you are trying
to decide between a thirty-year and a fifteen-year loan, consider the following:
Paying your loan over fifteen years can save you thousands of dollars in interest.
Paying less interest results in less of a tax deduction. Determine in advance if
a larger tax deduction (with a thirty-year loan) will offset the benefits derived
from paying less interest (with a fifteen-year loan).
The payment on a thirty-year loan can be substantially less than the payment on
a fifteen-year loan of the same amount. You could obtain a thirty-year loan and
invest the difference in mutual funds, stocks, CDs, etc. If you could earn a higher,
after-tax rate on your investment than the rate you pay on your mortgage, it may
be advantageous to invest the difference.
The final decision you make will depend on your preferences. If your goal is to
live debt free, then a fifteen year mortgage may be right for you. If you goal is
to maximize your tax deductions, a thirty year loan may be best for you.
The most popular intermediate ARM loans are the 3/1, 5/1, 7/1 and 10/1. These loans
are normally amortized over thirty years with the interest rate initially fixed
for three, five, seven and ten years respectively. After the initial fixed period,
these loans typically adjust annually.
Intermediate ARMs are very popular with borrowers who want the stability of a fixed
rate and the benefit of a lower introductory rate. If you plan to sell or refinance
your home in three to ten years, you may want to consider an intermediate ARM loan
rather than a fixed-rate mortgage. You can save money with the lower introductory
rate, but you risk having a higher rate if you are still in your home when the introductory
rate period expires and the rate starts adjusting toward market levels.
Loan programs with less
than perfect credit
Are there loan programs available for borrowers with less than perfect to extremely
poor credit? Absolutely. Fundamentally, all the lender wants to be assured of is
that 1) one has the ability, and 2) the desire to repay the debt. The worse one's
credit, the more evidence of one and two one will need to muster.
If you think you may be "credit challenged", one of the first things you'll want
to know is, just how "less than perfect" is your credit? Fortunately, many bright
people have dedicated their professional lives to creating methods for answering
such questions. Statistical models which balance numerous credit factors provide
methods for determining credit ratings. The models generate a single numberвЂ”a
credit, or FICO scoreвЂ”which provides lenders with a starting point for making
decisions about lending money.
How do you get your credit score? Currently there is no law requiring that consumers
be given their credit scores. Lenders aren't required to give you your credit scoreвЂ”but
some will if you ask them. The lender should, however, tell you what factors contributed
to your credit score if your score was a factor in delaying or denying your loan
application. Credit bureaus don't include credit scores on consumer credit reports.
Assuming you know your credit scoreвЂ”what does it mean? Credit scores fall between
approximately 375 to 900. Anything over 670 is considered good credit. Borrowers
with good credit are able to get the best financing rates and terms available to
the general public.
Lenders classify borrowers into the following credit categories based upon their
credit scores. These categories can vary slightly among lenders. For example, a
credit score of 620 could be a "B" with one lender, but a "C" with a different lender.
The lower your score, the more expensive and restrictive your potential financing
It would be confusing at best to present general underwriting guidelines in an attempt
to interpret credit ratings and scores as they relate to individual borrowers. In
A- through E credit scenarios, dozens of factors are considered in the decision-making
process. Your best assurance of getting the best possible loan is to shop among
More About Adjustable Rate Mortgages
An ARM is a loan which allows for the adjustment of its interest rate according
to the terms of the note and as market interest rates change. The ARM interest rate
is based upon one of many indices which reflect market interest rates. The borrower
assumes the risk that interest rates (and their monthly payment) will rise. By assuming
this risk, lenders may charge a lower initial interest rate compared to fixed rate
loans. The lower initial rate is the main reason borrowers choose ARM loans--it
allows them to qualify for a larger loan and obtain a higher-priced home.
Borrowers considering an ARM should familiarize themselves with standard ARM features.
These features include:
Start rate (Teaser rate): This temporary rate is the starting interest rate. It
is often referred to as the teaser rate. The start rate is lower than the fully-indexed
rate (sum of the index plus the margin), and lower than the market rate on fixed
Initial Adjustment Period: The length of time the interest rate is fixed initially.
For example, if the initial adjustment period were six months, the interest rate
would remain fixed for the first six months. Beginning in month seven, the loan
would adjust at regular intervals.
Regular Adjustment Period: The frequency at which the interest rate adjusts. If
the regular adjustment period were six months, the interest rate would adjust every
First Adjustment Cap: The maximum amount the interest rate can increase when it
adjusts for the first time. For example, if your teaser rate and first adjustment
cap were 5 percent and 3 percent respectively, the maximum your rate could increase
after the initial adjustment period would be 8 percent.
Regular Adjustment Cap: The maximum the interest rate can adjust up or down each
Lifetime Cap: The maximum interest rate allowed over the life of the loan.
Index: The variable index referenced in your note. The margin is added to the index
to set the ARM interest rate. The index can usually be found in business newspapers.
More information about various indices is available below.
Margin: A fixed number which is added to the index to arrive at the ARM rate.
Fully-indexed rate: The fully-indexed rate is equal to the index plus the margin.
Your loan always adjusts toward this rate.
Conversion Options: Some ARMs have an option which allows the borrower to convert
the ARM to a fixed-rate loan. Exercising the option usually must ocurr within a
predetermined time frame; the fixed rate is determined by a formula. For example,
a one-year T-bill ARM may be converted to a fixed-rate loan during the first five
years on the adjustment date. I.e., you could convert during the thirteenth, twenty-fifth,
thirty-seventh, forty-ninth or sixty-first month.
Computing the fully-indexed mortgage rate:
The formula to calculate the fully-indexed interest rate is:
fully-indexed rate = value of index + margin
Note: The rate you pay after one or more adjustments may not be the fully-indexed
rate. This can ocurr when the interest rate adjustments are limited by a cap.
Popular ARM programs. Some of the more popular ARM programs include:
One-Year Treasury Bill ARM
Adjusts annually with a two percent annual cap.
Six-Month Certificate of Deposit (CD) ARM
Adjusts every six months with with an adjustment cap of 1 percent. The CD rate is
very volatile and changes quickly with the market.
Six-Month Treasury Average ARM
This index is relatively stable because it averages the treasury rate over the previous
six months. This loan has a maximum interest rate adjustment of 1 percent every
Twelve-Month Treasury Average ARM
This index is relatively stable because it averages the treasury rate over the previous
twelve months. This loan has a maximum interest rate adjustment of 2 percent every
Three-month COFI ARM
The COFI is one of the most stable indices and adjusts very slowly. The three-month
COFI ARM typically has a very low start-rate for the first three months, after which
time the interest is fully indexed and adjusts monthly.
PLEASE PRINT AND RETAIN A COPY OF THIS AGREEMENT FOR YOUR RECORDS.