The best way to find the 'right' answer is to discuss your finances and your preferences with a mortgage professional.

ARM (Adjustable Rate Mortgage)

Adjustable Rate Mortgage loans usually begin with an interest rate that is 2 to 3 percent below a similar fixed rate mortgage. (FIXED RATE SECTION) The interest rates are adjusted, typically every year, depending on the market conditions. An ARM will allow you to qualify for more money or buy a more expensive home. These loans are also beneficial if you are planning to move in a few years.

There are four standard ARM programs:

6-Month Certificate of Deposit (CD) ARM A maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index typically reacts quickly to changes in the market. 1-Year Treasury Spot ARM A maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index usually reacts slower than the CD index, but quicker than the Treasury Average index.

6-Month Treasury Average ARM A maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets.

12-Month Treasury Average ARM A maximum interest rate adjustment of 2% every 12 months. The Treasury Average index normally reacts more slowly in fluctuating markets.

There are also mortgages that combine certain features of fixed and adjustable rate mortgages called hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM). These loans can offer both lower interest rates and a fixed payment for a longer period of time (3 years, five years, and seven years, respectively) than most adjustable rate loans.

• Q: Why would I want an ARM vs. a Fixed Rate?An ARM allows you to receive more money at a lower interest rate than a fixed rate loan. If you are planning to move within a few years, you can save money and avoid rising payments. Fixed Rate A fixed rate mortgage is when the interest rate remains constant throughout the life of the loan. The most common fixed rate mortgages are repaid over a period of 30 years or 15 years. Thirty-Year Fixed Rate Mortgage The traditional 30-year, fixed-rate mortgage has a constant interest rate and monthly payments that never change. If you intend to stay in your home for seven years or longer, this may be a good option for you. However, if you plan to move within seven years, an adjustable rate loan may be less expensive. Fixed rate loans are particularly beneficial when interest rates are low because you can lock in (RATE LOCK SECTION) the low rate for the duration of your loan. Fifteen-Year Fixed Rate Mortgage This loan is paid over a 15-year period and has a constant interest rate and monthly payments that never change. The advantages of a 15-year, fixed rate is that it offers a lower interest rate, and you'll own your home twice as fast. However, the disadvantage is that you commit to higher monthly payments. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn't that significant.

• Q: Should I trade my ARM for a Fixed Rate?By trading your ARM for a fixed-rate loan, you will not only reduce your payment, you will also likely lock in (RATE LOCK SECTION) an appealing rate for as long as you own your home. A one-year ARM may currently offer tempting introductory rates however, most experts recommend avoiding them, because you could easily have higher payments in the near future, even if interest rates don't rise. This is because after the introductory rate expires, ARMs are generally pegged to the one-year Treasury rate (5.25%) plus 2.75 percentage points, with increases of as much as two points per year. Assuming interest rates don't change, you would pay 7.59% in the second year (the full two-point increase) and 8% in the third year. Keep in mind, if you decide to move before your loan is due, you may be charged a pre-payment penalty. (GLOSSARY) On the other hand, there are circumstances where an ARM makes sense. If you are fairly certain that you'll be moving within five years, you can save money with a five-year ARM. These types of loans offer a fixed rate for five years and adjust annually thereafter. APR (Annual Percentage Rate) The APR is a figure that calculates the actual interest rate plus certain fees associated with securing a loan. APR’s allow you to compare lending companies, and measure the true cost of a loan. It also prevents lenders from advertising low rates and hiding fees. The APR is generally found next to the interest rate. For Example: 30-year fixed loan at 7% rate 1 point = 7.10% APR The following fees are typically included in the APR: Points-(WHAT ARE POINTS QUESTION?) both discount points and origination points Pre-paid interest (GLOSSARY). The interest paid from the date the loan closes to the end of the month. Loan-processing fee Underwriting fee (GLOSSARY) Document preparation fee Private mortgage-insurance (PMI SECTION) Refinance The most common reason to refinance is to save money and take advantage of low interest rates. You may also want to consider refinancing for the following reasons: Receive a lower interest rate, which will decrease your monthly payments. Convert your ARM (LINK TO: SHOULD I TRADE MY ARM FOR A FIXED RATE QUESTION) to a fixed rate mortgage. Reduce the term of the loan. For example, you might want to look into a 15-year, fixed-rate mortgage. With this plan, your mortgage payments are somewhat higher than a longer-term loan, but you end up paying less interest over the life of the loan and build equity more quickly. Consolidate your debts. (GLOSSARY/DEBT CONSOLIDATION) Acquire a cash out (GLOSSARY/CASH OUT REFI) for any number of purposes such as paying off second mortgages, credit lines, student loans, or home improvements. Cancel your Private Mortgage Insurance (PMI). (CANCEL PMI QUESTION)

• Q: Should I refinance my current loan?The decision whether or not to refinance can be complicated because much depends on costs, risks, and your individual needs. The main reason to refinance is to save money. Therefore, try this calculation to determine whether or not refinancing will be useful for you. Calculate the total cost of the refinance (i.e. $3,000) Calculate the monthly savings (i.e. $200) Divide the results from #1 by the results in monthly savings #2 (i.e. 3000/200). The result is called the “break even” time (i.e. 15 months). If you plan to live in your house longer than this amount of time, a refinance will save you money. Common refinancing mistakes: Taking cash out of your home equity lines If you have taken cash out recently, refinancing is subject to “seasoning” (GLOSSARY/SEASONED MORTGAGE) requirements (with the exception of home improvement purposes), and it may hurt your chances of refinancing. Refinancing your first mortgage before taking out a second mortgage Lenders look at your combined loans and the value of your property, even if you are refinancing your first loan. If the combined loan to value (CLTV) (GLOSSARY) is higher than allowed, your refinance may get turned down. Second Mortgage Second Mortgage is a loan option that allows you to receive money and make use of your home equity. (GLOSSARY) A second mortgage can eliminate your debt and decrease your monthly payments at a lower interest rate. Taking out a second mortgage can also be used for a multiple of reasons including: paying off debts, consolidating bills, making home improvements, purchasing a second home, or paying student loans. However, you may want to get a second mortgage before you refinance your first mortgage. Why? Many mortgage companies consider the combined loan amounts when refinancing. If you plan to refinance your first loan, be certain to talk to your mortgage professional to find out if getting a second mortgage will cause your refinance to be turned down. Appraisals An appraisal is an estimate of the market value of a property. An appraiser is a qualified professional who inspects your home, compiles data, and interprets the market to arrive at a value estimate. The estimate is derived by using three general approaches that include: Cost approach to value, meaning what it would cost to replace the improvements. Comparison approach to value is when an appraiser compares properties that are similar in size, quality, and location that have recently been sold. Income approach to value is an independent estimate of what an investor would pay for the house based upon the net income that the property produces.

• Q: Why would I need an appraisal? The most common reason for an appraisal is if you are buying or selling a home. However, an appraisal may also be helpful for the following reasons: obtaining a loan, lowering your taxes, settling an estate, or refinancing. Private Mortgage Insurance (PMI) Private Mortgage Insurance (PMI) is a type of insurance that protects the lender against losses that result from defaults or foreclosures on home mortgages. PMI is usually required when you purchase a house with less than a 20% down payment. The advantages of PMI is that it allows mortgage companies to accept lower down payments and accept loans that may be considered high risk, meaning that your loan does not fall under traditional, conforming (WHAT IS A CONFORMING LOAN QUESTION) guidelines.

• Q: Can I cancel my PMI? If you would like to cancel your PMI, contact your lender. You can typically cancel your private mortgage insurance after you have built up at least 20% equity in your home. Investors usually set the guidelines for PMI cancellation, and they often require an appraisal (APPRAISAL SECTION) of your home. Another way to cancel your PMI is to refinance (REFINANCE SECTION) and get a new loan without a PMI.

• Q: How can I pay off my PMI? PMI (LINK TO TOP) and FHA (Federal Housing Administration) (GLOSSARY) insurance are similar in concept however; FHA insurance is a government-administered mortgage insurance program. Therefore, it has some restrictions including lower maximum regional loan limits, higher prices, longer approval time, and fewer payment plan options. However, unlike PMI, FHA insurance lasts for the duration of the loan. Balloon Mortgage Balloon mortgage is a loan that is amortized (GLOSSARY) for a longer period of time than the term of the loan. There are a variety of term lengths but, typically, this refers to a 30-year, fixed-rate loan and a term of five to seven years. At the end of the term, the remaining amount of the loan is due. The final lump-sum payment is called the balloon payment. You may want to refinance (REFINANCE SECTION) to settle your balloon payment. In addition, many companies have conversion options at the end of the term that you may want to discuss with your mortgage professional. Graduated Payment Mortgage (GPM) Graduated Payment Mortgage (GPM) is similar to an adjustable rate mortgage (ARM) (ARM SECTION) in that you begin at a lower payment to assist you in qualifying for a loan. GPM’s will allow you to make smaller monthly payments initially and to increase the size of payment over time. However, graduated payment mortgages increase yearly between 7.5% and 12.5%. GPM’s are available in both 30-year and 15- year amortization. (GLOSSARY) In addition, GPM’s have what is called a negative amortization, (GLOSSARY) meaning that because the monthly payments are not large enough to pay off the loan, the unpaid interest is added to the unpaid balance of the loan. This loan option is particularly useful for first-time homebuyers and for households that expect their income to rise. Veterans Administration (VA) Loans The initial step to obtaining a VA loan is to apply for a Certificate of Eligibility by submitting a completed VA Form 26-1880, Request For A Certificate of Eligibility For Home Loan Benefits, to one of the VA Eligibility centers, along with proof of military service. Be certain to present your lender with your certificate of eligibility as well as a complete loan application. The lender will request VA to assign a licensed appraiser (GLOSSARY) to determine the market value of the property. A VA appraisal guarantees the loan, not the condition of the property, so you may wish to hire an inspector to survey the property for defects. The lender will then review your loan application and verify your income, assets, and credit report. If the lender approves the information, and if the appraised value of the property is adequate to cover the loan needed, the lender can then close the loan under VA’s automatic procedure BuyDown Options A buydown is when you pay additional points (POINTS SECTION) on the loan up front, in order to reduce your monthly payments. There are generally two types of buydown options: a permanent buydown and a temporary buydown. A permanent buydown is when you prepay a significantly larger amount of interest to permanently lower the interest rate, thus lowering your monthly payments. With a temporary buydown, only a certain amount is prepaid to lower the payment for the first few years. You may want a temporary buydown to lower your current payments in order to qualify for the loan. Consider a temporary buydown if you believe your income will continue to increase as the interest increases. There are two common temporary buydown options called 3-2-1 buydown and 2-1 buydown. With a 3-2-1 buydown, the mortgage payment in the first, second, and third year is calculated at rates 3%, 2%, and 1%, respectively, below the rate on the loan. On a 2-1 buydown, the payment in the first and second year is calculated at rates 2% and 1% below the loan rate. Federal Housing Administration (FHA) The FHA began in 1934 to advance opportunities for Americans to own homes. The FHA provides private lenders with mortgage insurance, thus giving them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA program makes purchasing a home easier and less expensive because you don't need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. There are many advantages to FHA loan programs including: minimal down payment and closing costs, 100% financing options, no minimum credit scores, and higher debt-to-income (GLOSSARY) ratio than conventional loan programs.

• Q: What is the difference between PMI and FHA? PMI (LINK TO TOP) and FHA (Federal Housing Administration) (GLOSSARY) insurance are similar in concept however; FHA insurance is a government-administered mortgage insurance program. Therefore, it has some restrictions including lower maximum regional loan limits, higher prices, longer approval time, and fewer payment plan options. However, unlike PMI, FHA insurance lasts for the duration of the loan. Balloon Mortgage Balloon mortgage is a loan that is amortized (GLOSSARY) for a longer period of time than the term of the loan. There are a variety of term lengths but, typically, this refers to a 30-year, fixed-rate loan and a term of five to seven years. At the end of the term, the remaining amount of the loan is due. The final lump-sum payment is called the balloon payment. You may want to refinance (REFINANCE SECTION) to settle your balloon payment. In addition, many companies have conversion options at the end of the term that you may want to discuss with your mortgage professional. Graduated Payment Mortgage (GPM) Graduated Payment Mortgage (GPM) is similar to an adjustable rate mortgage (ARM) (ARM SECTION) in that you begin at a lower payment to assist you in qualifying for a loan. GPM’s will allow you to make smaller monthly payments initially and to increase the size of payment over time. However, graduated payment mortgages increase yearly between 7.5% and 12.5%. GPM’s are available in both 30-year and 15- year amortization. (GLOSSARY) In addition, GPM’s have what is called a negative amortization, (GLOSSARY) meaning that because the monthly payments are not large enough to pay off the loan, the unpaid interest is added to the unpaid balance of the loan. This loan option is particularly useful for first-time homebuyers and for households that expect their income to rise. Veterans Administration (VA) Loans The initial step to obtaining a VA loan is to apply for a Certificate of Eligibility by submitting a completed VA Form 26-1880, Request For A Certificate of Eligibility For Home Loan Benefits, to one of the VA Eligibility centers, along with proof of military service. Be certain to present your lender with your certificate of eligibility as well as a complete loan application. The lender will request VA to assign a licensed appraiser (GLOSSARY) to determine the market value of the property. A VA appraisal guarantees the loan, not the condition of the property, so you may wish to hire an inspector to survey the property for defects. The lender will then review your loan application and verify your income, assets, and credit report. If the lender approves the information, and if the appraised value of the property is adequate to cover the loan needed, the lender can then close the loan under VA’s automatic procedure BuyDown Options A buydown is when you pay additional points (POINTS SECTION) on the loan up front, in order to reduce your monthly payments. There are generally two types of buydown options: a permanent buydown and a temporary buydown. A permanent buydown is when you prepay a significantly larger amount of interest to permanently lower the interest rate, thus lowering your monthly payments. With a temporary buydown, only a certain amount is prepaid to lower the payment for the first few years. You may want a temporary buydown to lower your current payments in order to qualify for the loan. Consider a temporary buydown if you believe your income will continue to increase as the interest increases. There are two common temporary buydown options called 3-2-1 buydown and 2-1 buydown. With a 3-2-1 buydown, the mortgage payment in the first, second, and third year is calculated at rates 3%, 2%, and 1%, respectively, below the rate on the loan. On a 2-1 buydown, the payment in the first and second year is calculated at rates 2% and 1% below the loan rate. Federal Housing Administration (FHA) The FHA began in 1934 to advance opportunities for Americans to own homes. The FHA provides private lenders with mortgage insurance, thus giving them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA program makes purchasing a home easier and less expensive because you don't need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. There are many advantages to FHA loan programs including: minimal down payment and closing costs, 100% financing options, no minimum credit scores, and higher debt-to-income (GLOSSARY) ratio than conventional loan programs.

• Q: Who can qualify for FHA loans? FHA loans are not only for first-time homebuyers. As long as you do not have more than one FHA insured loan at a time, you can apply for an FHA loan. FHA loans are among the most flexible mortgage loans and require less than 5% down payment. The typical FHA loan qualification guidelines are as follows: two years steady employment at the same or increasing income, a credit report with less than two thirty day lates in the last two years, bankruptcy at least two years old, and foreclosure at least three years old. In addition, your new mortgage payment should be approximately 30% of your gross income.

• Q: What is the FHA loan limit? FHA loan limits vary throughout the country depending on the cost of the area. In addition, FHA maximum amounts are linked to the conforming loan limit and average home prices. Therefore, FHA loan limits may change. Be sure to ask your mortgage professional for details and current loan limits.

• Q: What is the debt-to-income ratio for FHA loans? The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other types of debt. With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing and other debt.

• Q: What are credit scores? A credit score analyzes your credit history by considering the following factors: late payments, the amount of credit established, the length of time at your present residence, employment history, collections, and bankruptcies. A lender will take into account your credit score when qualifying you for a loan. Lenders generally utilize an A- through D (or comparable) credit ranking system. The typical breakdown is as follows: A- MINUS CREDIT: Contains very minor or no credit problems within the last two years, one or two 30-day late payments, and no record of collections. B CREDIT: This is where the majority of credit reports fall. This may include a few late payments within the last 18 months, and up to four 30-day late payments, or up to two 60-day late payments. If the late payment is a single incident, one 90-day late payment is allowed within the last 12 months. C CREDIT: May include several late payments in the 30 to60 day range in the past few years, and any late mortgage payment that is in the 60 or 90 day range. It can also contain a bankruptcy or foreclosure that had been discharged or settled in the last 12 months. D CREDIT: Includes anything from open collections, charge-offs, notice of defaults, to multiple 30, 60, and 90day or longer missed payments.

• Q: How can I improve my credit rating? There is no guaranteed cure for a poor credit score; however, the best and most efficient way to improve your credit report is to make your payments on time. In addition, do not apply for credit frequently, because a large number of inquiries on your credit report can negatively affect your rating. Try to reduce your credit card balances as well.

• Q: What if there is a mistake on my credit report? If you believe there is an error on your credit report, there are three credit bureaus that you can contact: Experian, Trans Union, and Equifax. Each bureau will give you information on how to dispute errors. It is recommended that you do not apply for credit while a dispute is pending. Investigations are typically completed within 30 days of the date the request is received.

• Q: What is involved in closing costs? After your loan is approved, you will attend a closing to sign the final loan documents and pay your down payment and closing costs. Specific closing costs may vary, but they normally include the following: Attorney or escrow (GLOSSARY) fees Property taxes (GLOSSARY) Pro-rated interest (GLOSSARY) Loan origination fee (GLOSSARY) Recording fee (GLOSSARY) Survey fee (GLOSSARY) Any other documentation fees First premium of mortgage insurance PMI (if applicable) (PMI SECTION) Title Insurance (GLOSSARY) Loan discount points (GLOSSARY) First payment of escrow account for future real estate taxes and insurance Paid receipt for homeowner’s insurance policy (fire and flood if applicable)

• Q: What is a rate lock? A rate lock is a contractual agreement between the lender and the buyer. There are four components to a rate lock: Loan program Interest rate Points Length of the lock Once you have completed a loan application and chosen a property, you can lock in your interest rate. Locking in a rate allows you to keep a certain loan program and interest rate over a specified amount of time, even if the interest rates go up during that time. Usually, rates are locked in on a 45 and 60-day basis. Keep in mind, a lock usually cannot be changed, so it is important to consult your mortgage professional for advice. In addition, most lenders will not adjust your lock if rates drop, unless the drop is substantial.

• Q: How long will it take to apply and close a loan? The average amount of time from application to close is six weeks, but this time may vary depending on your lender.

• Q: What are points and how do they work? Points are fees paid to the lender at closing. (GLOSSARY) One “point” is equal to 1% of the total loan amount. For instance, for a $200,000 loan, one point would equal $2,000. Most lenders charge between 1 and 2 points. If you want to lower your interest rate, you can pay more points up front. This is an effective way to save money by lowering your interest rate over the life of your loan. However, if you do not have money to pay upfront, opt for fewer points.

• Q: Why are some rates higher than others? An interest rate depends upon several factors. For instance, your rate will be higher if you have poor credit, put a limited amount of cash down, or have a high debt-to-income (GLOSSARY) (DTI) ratio. In addition, if you are going to purchase a condo, townhouse, manufactured home, second home, 2-4 units, or investment property, your rate will also increase. Your rate will be higher if you choose a no-doc (GLOSSARY) or stated (GLOSSARY) income loan as well. Loan Processing Steps Apply for the loan. Submit a completed loan application and other required documents. These documents may include: W-2 forms, one month of pay stubs, and recent bank statements. Credit Evaluation. Once you return the completed loan application, the lender will order your credit report for their evaluation. An Appraisal (APPRAISAL SECTION) will also be ordered at the time you turn in your application. During the Loan Processing period, a processor reviews your information and may request any additional documents. This process may take two to six weeks. Loan Closing (CLOSING COSTS) After the loan has been approved, you will attend a loan closing to review and sign the final loan documents. Your loan will generally close shortly after you have signed the loan documents.

• Q: How do I qualify for a loan? Complete a Fannie Mae (GLOSSARY) Form 1003 application with a bank loan officer, credit union loan officer, or licensed mortgage broker. Most banks allow you to apply on line as well. However, if you do not qualify for a conforming loan, for instance, if you have poor credit history (CREDIT RANKING) or a debt-to-income (GLOSSARY) ratio greater than 40%, consult your licensed mortgage broker for assistance.

• Q: How do I know how much of a loan amount I qualify for? Your loan officer and/or broker will tell you how much you qualify for after they review your application and pull credit. The loan amount depends on income and debt ratio. Your debt ratio is the total amount of monthly debt you pay out divided by your monthly income. The debt-to-income (GLOSSARY) ratio (DTI) lets the lender know how much mortgage debt you are able to handle. Pre-qualification Click here on our quick pre-qual tool to see if you pre-qualify for a traditional, conforming loan. However, pre-qualification does not guarantee that you will be approved for the loan. If you do not pre-qualify under the conforming, Fannie Mae (GLOSSARY) guidelines, your mortgage broker can discuss several options and offer strategies to qualify you for a loan, which may include: Switching to a stated income loan (GLOSSARY) Offering you an Adjustable Rate Mortgage (ARM SECTION) loan at a low starting rate Lowering your down payment by using the money to pay for revolving/installment debt (GLOSSARY), thereby improving your debt ratio Changing to a non-conforming (WHAT MAKES A LOAN NON-CONFORMING) loan program with a higher debt-to-income ratio Buying down (BUY DOWN OPTION SECTION) the interest rate

• Q: What is a conforming loan? There are several factors that determine whether a loan is non-conforming. For instance, if you have a low credit score and only 5% down, you would be considered a non-conforming borrower. Also, borrowers who want to purchase or refinance a home at a high loan-to-value (GLOSSARY) (LTV), i.e., 95% or 100%, fall under a non-conforming loan. In addition, if a borrower is unable to verify their income, they are considered to be non-conforming. For instance, self-employed borrowers who do not want to disclose income simply state how much they make on their 1003 application. Stated income loans at high LTV's are non-conforming as well.

• Q: What makes a loan non-conventional? There are several factors that determine whether a loan is non-conventional. For instance, if you have low credit scores and only 5% down, you would be considered a non-conventional borrower. Also, borrowers who want to purchase or refinance a home at a high loan-to-value (LTV), i.e., 95% or 100%, fall under a non-conventional loan. In addition, if a borrower is unable to verify their income, they are considered to be non-conventional. For instance, self-employed borrowers who do not want to disclose income simply state how much they make on their 1003 application. Stated income loans at high LTV's are non-conventional as well.