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Fixed Rate Mortgage (FRM)
A Fixed Rate Mortgage is exactly what it sounds like. FRMs are loans with interest rates that are fixed for the entire life of the loan.The 30 year fixed rate has traditionally been the most frequently acquired loan. However, more recently the 25, 20, 15 and even the 10 year fixed rates have become increasingly popular. Some people have even started to utilize the 40 year fixed rate. Typically, FRMs with fewer year terms are less expensive than loans with longer terms. So a 15 year FRM will have a lower rate and terms than a 30 year FRM.
Stated Income Loans
Although mostly absent for the past 10 years, stated income loans have began to make a comeback recently. You can now obtain a stated income loan for both owner occupied and investment properties. These loans require good credit history and a maximum 70% to 75% loan to value (LTV). They work best for self-employed borrowers, or borrowers that have a lot of rental income, however, we also have stated income programs for borrowers that are W2 employees.
Adjustable Rate Mortgage (ARM)
An Adjustable Rate Mortgage is fixed for a set period of time, afterwhich it adjusts the market flucuations. Examples include a 2/1 ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM and 10/1 ARM. The number before the / refers to the initial fixed rate period. On a 5/1 ARM the initial fixed period is 5 years. The second number, the one after the / refers to how frequently your interest rate can change after the fixed rate period. So on a 5/1 ARM once the initial 5 years have elapsed, your interest rate can rise once a year. Most ARM are amortized for a 30 year period. With a 5/1 ARM, your rate is fixed for 5 years, then adjust once a year for the remaining 25 year period. (Assuming you hold on to the loan for the entire duration. Most people will sell their home or refinance long before the 30 year amortization period ends.)
The initial fixed portion of the ARM is determined when you lock in your rate with your Loan Officer. The interest rate after the initial fixed period is determined by what are called "index" and "margin." The best pricing comes from ARMs based on the prime lending rate, also known as the "prime rate." The prime rate is set by the U.S Federal Reserve, which may change or remain unchanged during the Fed's scheduled meetings throughout the year. (Whether the Fed raises, lowers or keeps the prime rate unchanged is primarily determined by how the over U.S. economy appears to be doing at the time the Fed's scheduled meeting.) Second tier ARMs are usually based on LIBOR (London interbank offered rate).
Your initial loan disclosures will inform you if your ARM is based on the prime rate or LIBOR. This information will also be found in your closing loan documents as well. Once you deternime your index, to calculate your rate, you then have to find the "margin." The margin will also be found in your initial loan disclosures as well as your closing documents. The margin is determined by your lender, the ARM products they have available, and the pricing they offer for their loan products. You may often have the option to buy down the margin. An example of a margin could be 1%, or 2% or 2.75%. You then take your margin and add it to your index rate. So if your loan is based on prime, plus a margin of "1%", and your rate is scheduled to adjust today. If today's prime rate is 4%, and your margin is 1%, then your rate adjustment for today will be a rate of 5%.
ARMs will also come with annual and lifetime CAPS. If your cap is 5/2/5 on a 5/1 ARM, this means that once your rate becomes adjustable, the most it can adjust is 5% during the initial adjustment, 2% every year thereafter, with a lifetime maximum of 5%.