Mortgages Made Simple with Rick Gundzik

Tuesday, May 24, 2005
ARMs Index + Margin = ???
Most of you know an ARM is an adjustble rate mortgage, but very few loan officers explain how an ARM interest rate is calculated.

An ARM has 5 key numbers; the start rate, the annual cap, the lifetime cap, the index and the margin. The start rate is the interest rate that the loan starts at, eg. a 1 year ARM starts at 4.75% and stays at 4.75% for 1 year. The annual cap is the maximum that the loan can increase in one year. The most common annual cap is 2%. So after 1 year the loan in our example can not go over 6.75%. The lifetime cap is the maximum the loan can increase ever. Typically 6%, so our example loan can never go over 10.75%.

Now it gets tricky. The index plus margin is the rate your loan goes to after 1 year. Let's say the index is currently at 3.5%, if your margin is 2.75%, your new rate is 6.25%. Seems simple in our example, but generally this isn't explained very well.

That brings us to what a margin and index actually are: The margin is a seemingly arbitrary number that lenders calculate to build their cost into the loan. Margins range from 2% to 4% on normal loans to as high as 7-8% on subprime loans.

An index can be one of the following:
LIBOR - London Interbank Offered Rate
COFI - Cost of funds index
1 Year Treasury - The 1 year treasury bill yield

There are other indexes, but these are the most common. In general, the LIBOR and COFI are less volatile then the Treasury index, which means your interest rate won't go up as quickly.

The main point to take away from this, is be certain you can afford to pay the margin plus the index because this is the rate your loan will be at in a relatively short time.

The next blog will discuss fixed period ARMs.

For questions, please contact us at
posted by Pac Res @ 10:28 PM   1 comments
Sunday, May 15, 2005
Option ARMs - Are they a good option for you
Option ARMs have become extremely popular lately, representing close to 50% of all loan volume at a major nationwide lender. They used to be called 'Negative Amortization' loans, but seeming to be too negative a name, some clever marketer renamed these loans 'Option ARMs.'

The term Option ARM comes from the fact that you have 4 payment options each month; 1) a low teaser rate payment, 2) the Interest only payment, 3) a Principal and Interest payment, 4) and the 15 year Principal and Interest payment. Let me break these down for you.

Option 1 - Generally these loans start with a low teaser rate of 1%. Your payment is calculated at this rate.
Option 2 - Interest payment at the fully indexed rate
Option 3 - Principal and Interest payment at the fully indexed rate
Option 4 - 15 year Principal and Interest payment at the fully indexed rate.

The fully indexed rate is approximately 5.5% today and is calculated by taking the margin plus the index. The most common index being used today is the MTA. You'll also hear the COFI, COSI, CODI and LIBOR mentioned as indices. The margin ranges from 2 to 4% and is derived from various factors. But ASK your loan officer what the margin and index are because it will determine your payment. (The next blog entry will discuss how ARMs work, margins and indices)

The great benefit of this loan is if your income fluctuates, such as a salesperson, you can make any of the payments. If you have a big month, pay the higher payment. A lean month or unexpected repairs around the house, simply pay the lower payment. So this loan gives you choices.

The 'Negative' aspect is much worse. Let's take a typical $300,000 loan (common in high cost areas).
Option 1 payment = 964.92
Option 2 payment = 1375.00
Option 3 payment = 1703.37
Option 4 payment = 2451.25

As you can see the low payment is $738.45 lower than the payment you would be making on a normal loan. This difference is ADDED on to your principal balance. In this example, if you paid the lowest payment for 1 year at the end of the year you would now owe $308,861.40 on your mortgage. Not very desirable.

It gets worse. After 5 years they 'recast' or re-calculate your loan to enable you to pay off your loan in the remaining 25 years. If you have been paying the lowest payment, your payment could rise significantly.

The popularity of these loans comes from the fact that it gives you the ability to afford a home when prices have increased so rapidly. As long as you don't focus on payment Option 1 and keep in mind you really owe the higher payment you can keep yourself from any unwanted surprises.

For more information, please contact us.
posted by Pac Res @ 11:37 AM   0 comments
Wednesday, May 4, 2005
Title Insurance
What is title insurance? Title insurance is a necessary evil in the real estate world. Don't get me wrong, it is essential, but it's sooo expensive.

Title insurance is protection against loss arising from problems connected to the title to your property. Before you purchased your home, it may have gone through a few ownership changes. The land that your house is on probably went through many more. Over the years an error could have been made that could cause a problem. The most common problems would be unpaid income taxes, unpaid real estate taxes or possibly a mechanic's lien. Title insurance protects the lender from any of these types of claims to your property.

Title insurance doesn't protect your equity unless you were to buy an owner's policy. It doesn't protect you or the lender from future liens. This is why a new policy will be required for the person who buys your home. The new policy would protect their lender from anything you might have done wrong.

If you have any questions, please contact us.
posted by Pac Res @ 9:38 PM   0 comments

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