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Looking for a mortgage? I shop hard to make it easy for you. PanAm Mortgage Provides residential mortgages for cooperatives, condominiums, and 1-4 family houses for owner occupants and investors. Offers commercial mortgages for shopping centers, mixed-use buildings and other income producing properties, as well as real-estate-backed small business loans. Specializes in cooperatives and condominiums ¯ in business since 1990 Mortgage Options & Definitions Types of Mortgages Mortgages come in two basic types, Fixed rate and Adjustable rate. All other mortgages, with very few exceptions, are a combination of the two basic types. Fixed rate Mortgages: Fixed rate mortgages maintain the same rate and subsequently the same monthly payment for the life of the loan even if you make a pre-payment to principal! Originally set to amortize (pay themselves down to a zero balance) after 30 years, a payment to principal on this type of loan shortens the life of the loan rather than reducing the monthly payment. 30 year fixed rate loans are the most expensive types of loans because you are asking the lender to absorb the interest rate risk for a very long time. Most 30 year fixed rate mortgages end up not lasting more than about 7 years and so many people end up paying for rate protection for 23 years or more that they never use. Another factor to consider is that adding features like “no income check” or “co-op mortgages” are often more expensive in the form of “add-ons” to the rate or points of the mortgage than they are on Adjustable rate mortgages. Features like “interest only payments” may not be available at all. All of the above not withstanding, interest rates are still at historically low rates and if you believe that you will be living in your home for 10 or more years and do not believe that you will want or need to re-finance again in that period of time, then a 30 year fixed rate loan may be a smart long term investment for you. Adjustable rate Mortgages: Adjustable rate mortgages are the true 30-year mortgages because no matter how much you pay your mortgage down, if you don’t pay it off entirely, it will stay in place for 30 years. Years ago, adjustable rate mortgages were very basic in nature and adjusted in regular increments of every year, every 3 years, 5 years, or even once a month. The advantages of this class of mortgages are many. First, the thing that attracts most people to adjustable rate mortgages is that the initial interest rate and subsequently the monthly payments can be substantially less than a fixed rate loan. Additionally, when you make a pre-payment to principal on an adjustable rate mortgage, the monthly payment will be reduced when the loan is re-cast (generally the next time the loan adjusts). This feature makes this kind of mortgage attractive to people who expect to receive a large commission, royalty payment, inheritance or lottery win in the not too distant future and wish the flexibility of using it to lower the monthly payments on their mortgage. Recognizing that the attractiveness of adjustable rate mortgages (or ARM’s) was due in large part to the reduction in cost during the first few years, lenders have modified this type of loan into a kind of fixed/adjustable hybrid with the features of each combined in order to offer borrowers mortgage options that would more precisely fit their needs. Modern adjustables therefore, are usually fixed for only the initial period and adjust every year (or in some cases every month) after the initial fixed period ends. It is important to know what will happen when your loan starts to adjust. All adjustable mortgages have an index, which will be the yield of a widely recognized investment instrument (LIBOR, U.S.Treasurys and COFI are some of the more common indexes) to which a margin is added to determine your interest rate. Margins can vary between 1.3% and 6% with most varying between 2% and 3%. Because most of the indexes are slightly below 1.5% currently, most competitively priced ARM’s, were they to adjust today, would have a fully adjusted rate of about 3.75 to 4%. ARM’s commonly have interest rate caps, which determine the range in which the interest rate must remain. If interest rates rise such that the fully adjusted rate exceeds the interest rate cap, the borrower will only be charged as much as the cap allows. The most common cap structure is for there to be a life-time cap of 5% to 6% over the initial rate (initial rate + 5% or 6% = life-time cap) and annual caps that restrict the interest rate that you are charged from increasing (or decreasing) more than 2% from one year to the next. ARM’s that are fixed for an initial period of 3 years or more often allow the rate to adjust the full amount of the life-time cap on the first adjustment in a one time exception to the annual caps. Adjustable rate mortgages are also easier for a bank to hold in their own portfolio which means that lenders are at liberty to be more flexible in underwriting these loans and can offer more features than on 30 year fixed loans that must be sold into the secondary market. Let’s take a look at the kind of differences in monthly payments we are discussing. On a mortgage of $250,000: A 30 year fixed rate at 5.25% =…………………………………. $1,380 per month. A 5/1 adjustable at 4% =………………………………………… $1,192.50 per month (A savings of $11,250 over the first five years of the loan) A 5/1 adjustable at 4% with an interest only option = …………..$ 833.33 per month What are points and why should I pay them? Points, also known as “discount points or “pre-paid interest” allow a borrower to “buy up” or “buy down” their interest rate by making a one time payment at closing. When a mortgage broker tells you “You don’t have to worry about my fee, the bank pays me and you won’t have to pay any points!” what the broker is doing is increasing your rate to induce the lender to pay the broker their fee. The truth is that on many mortgages, it is to the borrower’s advantage to pay one or more points because that expense will be repaid through a lower interest rate in a short period of time you can see an example of this in exhibit “A” the right hand column shows interests rates (in this example for a 5/1 adjustable) varying from 4% at the top to 5.25% at the bottom the other three columns tell you the number of points that are associated with the rate in the left column. You can see quite clearly that on a 15 day rate lock, If a borrower pays the broker fee but no points to the bank, the rate will be 4.125% where as if the bank paid the broker 2% and the broker charged you nothing, the rate would be 5.125%. In that case you would then pay the bank back their 2% in full by the second anniversary of your mortgage and then you would continue to pay the bank an additional 3% (1% per year) over the next three years of your fixed rate period. Clearly this is not to your advantage. If it were not your intent to keep the mortgage for more than three years, then getting a 3/1 adjustable would be a more economic choice. EXHIBIT “A” Start Rate 15-Day 30-Day 45-Day 4.000 0.125 0.250 0.375 4.125 0.000 0.125 0.250 4.250 (0.500) (0.375) (0.250) ◄ 4.375 (0.750) (0.625) (0.500) 4.500 (1.000) (0.875) (0.750) 4.625 (1.125) (1.000) (0.875) 4.750 (1.375) (1.250) (1.125) 4.875 (1.500) (1.375) (1.250) 5.000 (1.750) (1.625) (1.500) 5.125 (2.000) (1.875) (1.750) ◄ 5.250 (2.125) (2.000) (1.875) Doesn’t APR give me a simple way to compare mortgages? In a word, NO. Several years ago our government started requiring lenders to quote the APR or average percentage rate, in all mortgage advertising to the public. The idea was that by taking the points and some of the other closing costs and dividing them over the life of the loan, and then adding that amount to the interest rate, consumers would finally have an easy way of comparing mortgage options. Unfortunately, APR is used far more often to confuse than to clarify as exhibit “B” shows. In this example, you can see that, just as in our previous exhibit, the column on the left shows the rate (this time on a 10/1 adjustable), the second column shows the points associated with the various rates and the third column shows the APR. At the bottom of the chart, you can see that in order to get a rate of 5.125% you would have to pay 3.125 points at closing. A normal person would assume that the APR would then be significantly higher than 5.125% to accommodate this large one time cost, however when you look at the third column for the APR, you see that it is stated at 5.09%! How can this be? Well, the bank figures the fully adjusted rate of the mortgage is only 3.75% so for the 20 years after the fixed rate period expires, if rates stay where they are now, the average cost over the full 30 years of the mortgage will be less than the original fixed rate. EXHIBIT “B” 10/1 T-Bill ARM (E1011) RATE NY - PTS APR 5.750% 0.000% 5.22% 5.625% 0.625% 5.19% 5.500% 1.250% 5.17% 5.375% 1.875% 5.14% 5.250% 2.500% 5.12% 5.125% 3.125% 5.09% Since 1990, PanAm Mortgage has been helping property owners and purchasers obtain the best financing available for their specific needs. We not only help you find the right mortgage, we work with you to create the best application package possible and then present it to our lenders for you. As important as all those things are however, the most important thing we do is to make sure that our clients are fully educated as to what options they have available to them, the potential effects of each of the significant details of those choices, and finally to the process itself. Plaease contact me with any questions you may have. Thank you, Baback Panah Please sign my guestbook! Sign in to be able to view Baback's guestbook and friends list!
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