Typically, option arm mortgage loans give the consumer four payment options each month – a 30year fixed payment, a 15 year fixed payment, an interest only payment and a deferred interest or minimum payment.
The 30 year, 15 year and interest only payments are based on the fully indexed rate. The fully indexed rate is calculated by adding the margin to the index. The index would most likely be the Libor, MTA, COSI, COFI, or CODI.
Heres an example:
Lets say you have a margin of 3.15 and an index of 3.32. This would give you a fully indexed rate of 6.47% (3.15 + 3.32 = 6.47). This is the rate that is used to compute the 30 year, 15 year, and interest only payments.
Depending on the lender and loan program you select, the deferred interest or minimum payment could either stay fixed between 1% and 2% for 5 years or the PAYMENT could start at around 1% and go up or down a maximum of 7.5% annually for 5 years.
The minimum 1% to 2% payment is an interest only payment and is based on a 30 or 40 year amortization.
The reason an option arm loan is called a deferred interest or negative amortization loan is because the difference between the minimum 1% payment and the interest only payment is added to the loan amount each month if the consumer chooses to make the minimum payment. So the loan balance increases over time instead of decreasing.
Once the loan hits the 5 year mark or if the deferred interest reaches 110% or 115% of the original loan amount, the loan will recast. Which means it will convert to an interest only or principal and interest loan at the fully indexed rate.
The fully indexed rate is calculated monthly and therefore could change from month to month.
Here are a few benefits of the option arm mortgage loan:
* The minimum payment is 100% interest; therefore, 100% of the payment is tax deductible
* The deferred interest is mortgage interest so it may be tax deductible
* If the client makes bi-weekly payments, the amount of deferred interest will decrease by approximately 30% or be completely eliminated.
* The minimum payment increases the clients cash flow
* This loan gives the client several payment options
* It also allows clients to use their mortgage as a financial tool to build wealth.
In closing, here are four important points to keep in mind when selecting an option arm loan program:
1) Get a 30 year amortization (not 40 years). The 30 year amortization will keep the 1% payment option available longer.
2) Choose an index which is less volatile. Like the MTA instead of the Libor.
3) Select an option arm program that has a 115% recast instead of a 110% recast to increase the chances of the payment options being available for the full 5 years.
4) Select an option arm with a low lifetime interest rate cap
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Interest only jumbo loans are a unique concept for borrowing, whether for a house or another major purchase. A traditional loan requires that each and every month monies be paid toward interest and principal. Interest only jumbo loans require payment of interest each and every
month, but payment of principal is optional.
Who can benefit from an interest only jumbo loan? One type of person who can benefit from interest only jumbo loans is a person who knows they will come into a substantial sum of money in a few years. Maybe you have a trust fund which states the monies will be free for use when you reach age 30, but at 24 you want to buy a home. Interest only jumbo loans are the perfect solution for you. The first years, you only make payments on the interest, but after your assets become available, you pay both interest and principal, or possibly choose to quickly pay off the principal.
Another group who can benefit from interest only jumbo loans is the family whose earning power is certain to grow over time. Interest only jumbo loans can allow purchases which provide for a comfortable lifestyle, putting off the larger principal payments until earning power has increased. A junior partner in a law firm might well feel that interest only jumbo loans would be the best option since they expect to greatly increase their income over the next years allowing repayment of the principal during the fatter years.
Interest only jumbo loans can be rather attractive in todays uncertain economy. There is absolutely no penalty involved if a debtor skips payment of principal for one or more months and only pays the interest. This feature can certainly pay off during a period of unemployment or other financial stress. Unlike the conventional mortgage where you will find yourself getting phone calls threatening foreclosure, the flexible interest only jumbo loan will allow you to survive periods of tight budget without this additional stress.
California real estate prices have jumped so much in recent years that refinancing mortgages has increased potential savings. With higher equity ratios, you can cash out part of your equity at
favorable rates. But dont limit your lender search just to in-state lenders. Look to online financing companies to give you the best deal on a refi.
Tap Into Increased California Home Values
With Californias hot housing market, home equity has shot up for most homeowners. Higher equity ratio makes refinancing easier. With a large equity base, lenders are more likely to offer low rates.
That means you can consolidate your high interest debt, renovate your home, or finance a college education at a reasonable price. And in most cases you can use the mortgage interest as a tax deduction.
Dont Just Look At In-State Lenders
Financing companies based across the nation are competing to get your refinancing business. Offering lower rates online than in their regular offices, you cant afford not to shop online for a lender.
Online lenders will give you free loan quotes that you can compare with other offers. As long as you dont give a lender permission to access your credit report while requesting quotes, it wont affect your credit score.
What To Look For In A Mortgage Lender
Great rates are the first thing people look for in a lender, but you want to be careful about fees. 3% is average for closing fees, so watch out for anything higher. You can also use the APR to evaluate loans and find which is truly the lowest costing loan.
A good lender will also give you prompt service. With most lenders you can ask questions any hour over the phone, email, or instant messenger. They are also prompt in mailing out information and contracts.
Once you are ready to commit to a lender, the process will take about two weeks. Most of the application is completed online with only the most basic information needed. Then the contract is mailed out the next day. Funds are often dispersed in less than two weeks directly to your checking account.
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