«Consumer Handbook on Adjustable-Rate Mortgages |i Consumer Handbook on Adjustable-Rate Mortgages Table of contents Mortgage shopping worksheet What ...»
Newspapers and the Internet When buying a home or refinancing your existing mortgage, remember to shop around. Compare costs and terms, and negotiate for the best deal. Your local newspaper and the Internet are good places to start shopping for a loan. You can usually find information on interest rates and points for several lenders. Since rates and points can change daily, you’ll want to check information sources often when shopping for a home loan.
The Mortgage Shopping Worksheet on page 2 may also help you.
Take it with you when you speak to each lender or broker, and write down the information you obtain. Don’t be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best deal.
Advertisements Any initial information you receive about mortgages probably will come from advertisements or mail solicitations from builders, real estate brokers, mortgage brokers, and lenders. Although this information can be helpful, keep in mind that these are marketing materials—the ads and mailings are designed to make the mortgage look as attractive as possible. These ads may play up low initial interest rates and monthly payments, without emphasizing that those rates and payments could increase substantially later. So, get all the facts.
show how long the rate is in effect and the APR on the loan. If the APR is much higher than the initial rate, your payments may increase a lot after the introductory period, even if interest rates stay the same.
Glossary Glossary Adjustable-rate mortgage (ARM) A mortgage that does not have a fixed interest rate. The rate changes during the life of the loan based on movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index. ARMs usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates increase, generally your loan payments increase; and when interest rates decrease, your monthly payments may decrease.
Annual percentage rate (APR) The cost of credit expressed as a yearly rate. For closed-end credit, such as car loans or mortgages, the APR includes the interest rate, points, broker fees, and other credit charges that the borrower is required to pay. An APR, or an equivalent rate, is not used in leasing agreements.
Balloon payment A large extra payment that may be charged at the end of a mortgage loan or lease.
Buydown When the seller pays an amount to the lender so that the lender can give you a lower rate and lower payments, usually for an initial period in an ARM. The seller may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages, not just ARMs.
A2 | Consumer Handbook on Adjustable-Rate Mortgages Glossary
Hybrid ARM These ARMs are a mix—or a hybrid—of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first several years of the loan; after that period, the rate can adjust annually. For example, hybrid ARMs can be advertised as 3/1 or 5/1—the first number tells you how long the fixed interest-rate period will be and the second number tells you how often the rate will adjust after the initial period. For example, a 3/1 loan has a fixed rate for the first 3 years and then the rate adjusts once each year beginning in year 4.
Index The economic indicator used to calculate interest-rate adjustments for adjustable-rate mortgages or other adjustable-rate loans. The index rate can increase or decrease at any time. See also the chart on page 8, Selected index rates for ARMs over an 11-year period, for examples of common indexes that have changed in the past.
Interest The rate used to determine the cost of borrowing money, usually stated as a percentage and as an annual rate.
A4 | Consumer Handbook on Adjustable-Rate Mortgages Glossary
Points (also called discount points) One point is equal to 1 percent of the principal amount of a mortgage loan. For example, if the mortgage is $200,000, one point equals $2,000. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages to cover loan origination costs or to provide additional compensation to the lender or broker. These points usually are paid at closing and may be paid by the borrower or the home seller, or may be split between them. In some cases, the money needed to pay points can be borrowed (incorporated in the loan amount), but doing so will increase the loan amount and the total costs. Discount points (also called discount fees) are points that the borrower voluntarily chooses to pay in return for a lower interest rate.
Prepayment penalty Extra fees that may be due if you pay off your loan early by refinancing the loan or by selling the home. The penalty is usually limited to the first 3 to 5 years of the loan’s term. If your loan includes a prepayment penalty, make sure you understand the cost. Compare the length of the prepayment penalty period with the first adjustment period of the ARM to see if refinancing is cost-effective before the loan first adjusts. Some loans may have a prepayment penalty even if you make a partial prepayment.
Ask the lender for a loan without a prepayment penalty and the cost of that loan.
Principal The amount of money borrowed or the amount still owed on a loan.
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Savings and loan associations (federally chartered and some state chartered) Office of Thrift Supervision (OTS) Consumer Affairs 1700 G Street NW, 6th Floor
Federally chartered credit unions (those with “Federal” in the name) National Credit Union Administration (NCUA) Office of Public and Congressional Affairs 1775 Duke Street Alexandria, VA 22314 (800) 755-1030 (toll free) (703) 518-6409 (fax) e-mail: firstname.lastname@example.org www.ncua.gov/ConsumerInformation/index.htm State-chartered credit unions Contact the regulatory agency in the state in which the credit union is chartered.
Finance companies, stores, auto dealers, mortgage companies, and other lenders, and credit bureaus Federal Trade Commission (FTC) Consumer Response Center - 240 600 Pennsylvania Avenue NW Washington, DC 20580 (877) FTC-HELP (877-382-4357) (toll free) (866) 653-4261 (TTY) (toll free) www.ftc.gov www.ftc.gov/bcp/edu/microsites/idtheft A8 | Consumer Handbook on Adjustable-Rate Mortgages
Looking for the Best Mortgage—Shop, Compare, Negotiate (at www.federalreserve.gov/pubs/mortgage/mortb_1.htm) Resources