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Products and Programs
Conforming Fixed Rate Loans
30, 25, 20, 15 and 10 Yr. Fixed Rate, The interest rate on these loans remains fixed and amortizes over the term. 30 Yr. Fixed Rate, has an Interest Only Option where interest only can be paid for the first ten years of the loan. After ten years, the payment is reset to amortize the loan over the remaining 20 years or 240 months.
Jumbo Fixed Rate Loans 30 & 15 Yr terms only: Jumbo is a term used to define the size of the loan, for example, loan amounts over the FNMA/FHLMC conforming limit, currently $417,000
Conforming ARM loans - 3/1, 5/1, 7/1 & 10/1 Libor & Treasury Indexes
ARM Loan - Adjustable Rate Mortgage. The three, five, seven, and ten - one arm loans feature fixed payments for the initial fixed period, followed by the loan adjusting on an annual basis for the balance of the term of the loan.
All ARM Loans have two components, INDEX and MARGIN. These two components make up the interest rate on an arm loan. Common indexes are the one year Treasury bill adjusted to a constant maturity, the LIBOR (London Interbank Offered Rate.) ARM loans can offer a borrower a rate that is sometimes three eighths to a half of a percentage point below what current fixed rates might be.
Jumbo ARM's- 3/1, 5/1, 7/1, 10/1 Libor and Treasury Indexes with Interest Only option available.
As stated above Jumbo ARM's are structured the same as conforming loans the only difference is in the size of the loan ($417,001 and above).
ARM Components
ARMs have two components: an index and a margin. ARMs all have an index that is the basis for the adjustments. Some of the more common indexes are the 1 year treasury security (adjusted to a constant maturity) and LIBOR (London Interbank Offered Rate.) The adjustment to the rate is calculated by adding the current index value to the margin rounded to the nearest eighth. Today's ARM loans have interest rate caps that prohibit the rate from increasing above pre-determined percentages. Caps are determined by the instrument and the index. ARMs can be structured with an initial fixed rate of three, five, seven or ten years.)
Index: All ARM loans are based on some index that is most often based on U. S. Government Securities like a one year treasury security or LIBOR an index tied to London Interbank Offered Rate. This index has become more popular with investors in recent years.
Margin: The amount added to the ARM index that investors require to compensate them for the risk of investing in mortgages.
Interest Rate Caps: These limit the amount the rate can increase at adjustment time. Treasury indexed margins are usually 2-2-6 and Libor margins 5-2-5.
Most Common ARMS: 3/1, 5/1, 7/1 and 10/1 - All of these loans are structured to operate the same way. The rate is fixed for the initial period (3 years, 5 years, 7 years or 10 years) and then becomes a one year adjustable thereafter.
Other Types of ARMS: Six month Libor ARM, Option ARM, COFI ARM - Shorter term indexes can produce lower rates but more frequent adjustments.
See the following examples of how Adjustable Rate Mortgages work:
Example: ARM Adjustment Process for a Five/One Libor ARM with caps of 2-2-5
Initial 5/1 ARM Rate for the first 60 months ---------- 5.5%
Adjustment at the 61st month as follows:
1 Year Libor Index ---------- 4.65%
Margin = 2.25% ---------- 2.25%
Fully Indexed Accrual Rate ---------- 6.90%
(Round up to the nearest eighth)
New Rate for the 6th Year ---------- 7.00%
Rate would adjust annually each year thereafter, subject to the interest rate caps on the loan.
Interest Rate Caps - there are three caps that come into play with ARM loans. The initial cap at the first adjustment, the periodic cap at each adjustment, and the life cap, which sets the upper limit for the maximum rate that can be charged throughout the life of the loan.
The initial interest rate cap can be set at 2% or 5%. In the example above, the initial cap would not come into play as the increase allowed by the formula did not permit the new rate to go above a 1.5% rate increase. If the index was 1% higher at 5.65% the new calculation would provide for the rate to be 5.65% + 2.25% = 7.90%. In this case the initial cap would matter as a 2% initial cap would limit the investors rate increase to 7.5% (Initial rate 5.5% + 2% cap = 7.5%) maximum rate at first change.
If the initial cap on the above example was 5% as is the case with many LIBOR based arms, the rate would go to 7.9% on the first change date as calculated (Index 5.65% + 2.25% = 7.90% or 8.00% rounded up to the nearest eighth.)
Private Mortgage Insurance
Private Mortgage Insurance or PMI is a form of guaranty that protects the investor against the risk of foreclosure on a conventional loan that is in excess of 80%. If your down payment is 20% or more, most investors and programs do not require PMI. Private Mortgage Insurance is a very helpful and useful product, and helps facilitate the purchase of millions of homes every year.
Because everyone applying for a home loan presents their own unique and specific qualities, a borrower should ask their lender to analyze which alternative is the best method for them; a conventional loan structure as explained above, or a single loan with private mortgage insurance.
Loan Structure
How a loan is structured will determine the amount of your mortgage payment. For example, is it better to structure an 80/10/10 loan or have one loan of 90% with private mortgage insurance? To properly obtain the answer Acadia National Mortgage will make a comparison of the two payments and asses the risk that each loan structure presents for you.
Loan Comparison
An alternative to a single loan with private mortgage insurance would be a 10%, 5%, 0% down conventional loan structure.
A "Piggy Back" loan or 80/10/10 creates two loans for the borrower. The first is an 80% first mortgage combined with a 10% second mortgage. The borrower is then required to make a 10% down payment.
Another possibility for structuring a loan is an 80/15/5. Starting with a maximum of an 80% first mortgage loan, combined with a 15% second mortgage. The borrower would have a 5% down payment.
And, finally, 80/20/0. The borrower does not have any down payment and is essentially borrowing 100% by combining a maximum 80% first mortgage with a 20% second mortgage. Today this loan structure is very common.
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