Fixed rate mortgages are available in increments of 5 years starting at 10 and out to as long as 40. They do not traditionally have any prepayment penalties and can be set up to collect and disburse the borrowers’ property tax and homeowners insurance. However, if the borrowers equity position is 20% or greater, the borrower can elect to pay those homeowners expenses on their own.
Adjustable rate mortgages (ARM) are available for the same terms as the fixed rates. The ARM interest rate can adjust on a predetermined date and again on that anniversary date.
They also do not traditionally have any prepayment penalties. The taxes and insurance features are the same as the fixed rates discussed above. The ARM loan is made up of an introductory rate, an index ( the adjustable component), a margin ( the fixed component), a fully indexed rate ( index plus margin) and the interest rate caps. The loans’ interest rate is recalculated on the predetermined date and will be based on the lower of the capped rate or the fully indexed rate. The rate will be revised on a predetermined schedule thereafter. The initial adjustment periods are traditionally 6 months or one year. However, there are intermediate ARMS that are fixed for multi-years to start and then adjust annually. Those are 3, 5, 7 or 10 years. The longer the introductory period the higher the introductory rate will be. ARM loans can be confusing and it is important to fully understand how they work and analyze them in the worse case scenario.
Mortgage insurance is a required component if the borrower's’ equity position is less than 20%. This insurance is of no benefit to the borrower and benefits the lender in the event of the borrowers default.
A blend mortgage combines a conforming first mortgage with a second mortgage to avoid the above requirement for mortgage insurance. This can be done with a 10% equity position. The other benefits of this type of loan structure is normally lower payment requirements, the ability to payoff the second and eliminating that payment amount.
Rapid rescore is a program that allows a credit score to potentially be improved in the event a creditor reported incorrect information. This program is available for consideration if the applicant can provide letters of correction directly from the creditor reporting the information.