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AFS_20Mortgage_20info_2011-18-08

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					Loan Types (Financing Options)

Adjustable-Rate Mortgage (ARM):                 Also known as a variable-rate loan,
usually offers a lower initial rate than fixed-rate loans. The interest rate can change
at specified time periods based on changes in an interest rate index that reflects
current finance market conditions, such as the LIBOR index or the Treasury index. The
ARM promissory note states maximum and minimum rates. When the interest rate on
an ARM increases, the monthly payments will increase and when the interest rate on
an ARM decreases, the monthly payments will be lower.


Adjustable-rate mortgages (ARM) are popular because they usually start with a lower
interest rate, so your monthly payments are lower. This allows you to qualify for a larg-
er mortgage than would be possible with a fixed-rate mortgage. The interest rate on
an ARM is adjusted periodically based on an index that reflects changing market
interest rates.

It's important to understand all the aspects of ARMs before you make your decision.
Below is an overview of the adjustable-rate mortgage. Be sure to contact your lender
for all the specifics related to this type of mortgage.


• ARMs have a lower initial interest rate than fixed-rate mortgages. The
   difference in cost may allow you to qualify for a more expensive home.

• ARMs can be a good choice when interest rates are high. If interest rates are
   high when you get the mortgage but drop over the initial period or any
   subsequent adjustment period, your monthly payment may decrease.


• An ARM that has its initial adjustment after the 5th or 7th year can save you
   money if you plan to stay in your house that long.




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• All ARM interest rate adjustments are based on a published market index. Some
    frequently used indexes include Certificate of Deposit, U.S. Treasury Bill, Cost-of-
    Funds, and LIBOR.


• ARMs have defined adjustment periods that determine how frequently the
    interest rate can change. The initial period before the first adjustment can be
    short (1 or 3 years) or quite long (7 or 10 years). After the initial period the
    interest rate on most ARMs adjusts every year.


• Once the initial period is up, the interest rate can increase or decrease based
    on an index plus a certain percentage, known as the margin. ARMs have rate
    caps, or ceilings and floors, on how much the interest rate can increase, and
    in some cases, decrease.


• There are caps on the amount of the interest rate increase or decrease on the
    first change date after the initial period, on each subsequent periodic
    adjustment and over the life of the loan. For example, a 5/1 ARM may have
    a 5% cap on the change in the interest rate on the first change date (after the
    5 year initial period), a 2% cap on the change in the interest rate each year
    after the first change date, and a 5% cap on the increase (but not the
    decrease) over the term of the loan.


•    Be sure to look at what the maximum monthly payment could be with he
    ARM you are considering to be sure you can afford it.


• Even though the interest rate on an ARM may increase over the term of your
    mortgage, it may still be a good choice if you expect your income will
    increase over the life of the loan because your initial payments are lower than
    with a fixed-rate mortgage. When the interest rate and your payments
    increase, you will still be able to make the payments from your higher
    income.



                                        XXVII-5
                                 Types of ARMS

There are many different types of ARMs. We've listed the most common:


        • 10/1 ARM
        • 7/1 ARM
        • 5/1 ARM
        • 3/1 ARM
        • 1/1 ARM


The first number is the length of the initial period – how long it is until the first
interest rate adjustment. For example, the interest rate on a 10/1 ARM will not
change for the first 10 years but can change in the 11th year. People often plan
to sell or refinance their home before the end of the initial period.


Balloon/Reset Mortgage: A mortgage with monthly payments based on a
30-year amortization schedule and the unpaid principal balance due in a lump
sum payment at the end of a specific period (usually 5 or 7 years) earlier than
30 years. The mortgage contains an option to reset the interest rate to the current
market rate and to extend the maturity date provided certain conditions are satis-
fied.


Balloon/reset mortgages may be a good choice for homebuyers who don't
expect to own their home past the maturity date of the balloon note: 5 or 7
years. Below is an overview of balloon/reset mortgages.


Balloon/reset mortgages have monthly mortgage payments based on a 30-year
amortization schedule but the entire mortgage balance becomes due at the end
of the 5 or 7-year term.




                                        XXVII-6
However under the reset option you may be able to "reset" your mortgage
interest rate at the market rate at that time for the remainder of the amortization
period if:


      •      You are still the owner and occupant of the home


      •      You have not been delinquent in your mortgage payments for a year
             before the maturity date of the balloon note


      •      You have no other liens against the property


      •      You have satisfied certain other conditions of the reset


You may also qualify to refinance your balloon/reset mortgage.


You might also consider a balloon/reset mortgage if you can't afford the home you
want because the monthly payment for an ARM or fixed-rate mortgage exceeds
your Debt-to-Income Ratio. Balloon/reset mortgages typically come with a slightly
lower initial rate than many other mortgage types.


If interest rates have increased during the term of the balloon note, when you reset
or refinance your mortgage, the interest rate you pay will be at the current rate.
This may be quite an increase in your monthly payments.


Balloon Programs: 5,7,10 year Balloon: Loan payments are calculated
based on a fixed rate schedule (usually a 30 year fixed rate program) these
payments are paid monthly for a specified term (5,7,10 years). At the end of the
term, balance must be paid in full "balloon payment" (immediately).




                                         XXVII-7
         Types of Balloon/Reset (Two Step) Mortgages

There are several types of balloon/reset mortgages:


7/23 Balloon
5/25 Balloon


Understanding the specifics...


• The two numbers combined indicate the total number of years that the pay-
   ments will be based on. In other words, your monthly payments will be
   calculated as if the mortgage had a 30-year term.


• The first number is the number of years before the balloon maturity date and
   the second number is the balance of the term.


• If you exercise your option to reset your balloon/reset mortgage, the reset
   mortgage will have a term of 23 or 25 years. For example, a 7/2 balloon/
   reset mortgage means that your payment for the first 7 years will be based on
   a 30-year amortization but at the end of the 7 years, you would need to
   exercise the reset option or refinance the mortgage and pay off the loan
   balance.


At the balloon maturity date, many borrowers exercise the reset option and reset
the interest rate to the market rate and extend the term 23 or 25 years. Some
borrowers refinance their homes when the balloon note comes due.


Conventional: Mortgage loan is not insured by the Federal Housing Authority
(FHA) or guaranteed by the Veterans Administration (VA), although Private
Mortgage Insurance (PMI) is required by the lender when buyer's down payment
is less than 20%.



                                     XXVII-8
Fixed-Rate Mortgage: A mortgage whose interest rate and monthly payment
does not change during the entire term of the loan. Fixed-rate mortgages are
stable and offer long-term savings. Because the interest rate have
changes, the monthly principal and interest payment never changes
either. If you plan to own your home for at least 5 years, a fixed-rate
mortgage can help protect you from inflation. Because your mortgage
principal and interest payment remains the same it is easier to budget.


•   Fixed-rate mortgages may be offered with 10, 15, 20 and 30 year
    terms.


•   A monthly principal and interest payment that doesn't change helps
    with financial planning.


•   If interest rates go down, your monthly principal and interest
    payment will not decrease unless you refinance your mortgage.


       Longer Terms such as 20 and 30 years:

•   Qualify for a larger loan amount.


•   Have higher interest rates.


•   Pay more interest in total than shorter-term loans.


•   Is a good choice if you don't plan to move or refinance for at
    least 10 years or if interest rates were low when you locked in the
    rate.




                                  XXVII-9
        Shorter terms such as 10 and 15 years:

•   Have lower interest rates.

•   Have a shorter period (term) to pay back the principal. Because of the shorter
    term the monthly payments are higher but more of the payment goes to
    principal and less to interest.

•   Build equity faster.

•   Have higher monthly payments – because of which, you may qualify for a
    smaller loan amount.

•   Are a good choice if you want to build equity quickly or you'd rather pay
    less interest than buy a more expensive home.

FHA & VA: FHA - Loan insured by the Federal Housing Administration (Limits on
loan amount vary between counties, call local lender for loan limits) VA - Loan is
guaranteed by the Veterans Administration (Borrower must be a veteran of U.S.
Armed Services) *These loans are backed by Government Agencies and insure the
lender against borrower default. Since these loans usually require little or no down
payment (0% - VA loans, 3-5% - FHA loans). They make housing available to buy-
ers that could normally not afford a substantial down payment.

Graduated Payment Mortgage (GPM): Loan payments are smaller at the
beginning of the loan. Payments rise on a fixed schedule or a predetermined num-
ber of years (usually 5, but sometimes 10). The first few years of payments are
applied to interest payment only. Due to the fact that the loan principal balance can
actually increase under this program, negative amortization may occur. It is recom-
mended that buyers consult their lenders if considering this program.

GEM (Growing Equity Mortgage): Each year payments are increased by a
predetermined percentage (typically 7 1/2%). This increase is applied directly to
the repayment of the principal of the loan.

                                      XXVII-10
                                Choosing the Best Loan Program

There are several factors to consider when choosing a loan. Do you want the
stability of a fixed rate, or are you willing to accept a little more risk in exchange
for the lower initial rate of an adjustable rate mortgage? How long do you plan
to stay in your home? How much do you want your monthly payment to be? The
following chart outlines the loan programs that may be right for you based on
your goals.


                                                       30 YR 15 YR   5/1   3/1   Option Interest 5-YR 7-YR
                           Goals
                                                       Fixed Fixed   ARM   ARM   ARM Only Balloon Balloon
I look for monthly cash flow savings to invest or to
reduce high cost credit obligations
I want to have more flexibility in managing my mort-
gage interest payments to maximize tax
advantages
I would like to take advantage of the lower initial
interest rate and payments associated with monthly
adjustable-rate mortgages and am comfortable with
more frequent payment fluctuations due to changing
interest rates.

I want a stable monthly payment
I want to buy as much house as I can
I plan to own my house in 5 years
I believe interest rates are likely to fall
I believe interest rates are likely to rise
I need flexible monthly payments
I want to avoid negative amortization
I want the lowest possible payments
I plan to refinance within 5 years
I want more control over my monthly cash flow
I have unsteady income, I need flexible payment
options
I want to pay off my home as soon as possible but I
want a stable monthly payment to do so.
I would like to purchase a larger house without
increasing my monthly mortgage expense




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