Your Guide to Home Financing That Builds Wealth
Areas of Interest
Annual Percentage Rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points).
First Adjustment: This is simply the month in which the first interest rate adjustment can take place.
Index: All adjustable and hybrids always have an index rate. The index is added to the loan’s margin in determining the future rate.
Interest Rate: This is the start rate for any loan. This rate can be fixed and/or adjustable and can change per the terms of the loan listed in the promissory note provided by the lender.
Life Adjustment: This refers to the maximum interest rate adjustment possible on a loan.
Loan Limits for Bay Area (For other areas, please contact me)
High Balance Loan Limit (Varies by County)
Loan to Value Considerations: Loan to value, or LTV as it is commonly referred to, is the ratio of Loan Amount to the
Value of a property. LTV considerations become important in several situations.
When a property is purchased, the down payment is critical to the lending decision. When the down payment is less than
20%, i.e. the LTV is greater than 80%; a lender will generally require mortgage insurance. This requirement also means that the loan will usually require an additional level of approval, from a Private Mortgage Insurance Company. Mortgage insurance coverage, or PMI, is a premium or fee which is included in the monthly mortgage payment. It can range from
.22% to almost 1% of the loan amount annually, with the exact coverage determined by the loan type, insurance company, and LTV. Mortgage insurance payments are not tax deductible. Mortgage insurance can be eliminated in certain cases. Ask your loan agent for these possible options. In a refinancing transaction, the ratio of loan amount to appraised value is taken into account in a similar way. Especially when a client wants to obtain cash out in a transaction, the typical rule is a maximum of 75% of the appraised value for the total loan amount including any cash out. There are lenders who will go beyond the 75% limitation; however, the loan products and interest rates offered are generally not as competitive. Rate and term refinances, or borrowing the current loan amount plus applicable closing costs, can go up to 80% without requiring Mortgage Insurance. Again, at 80.01% or greater the new lender will demand mortgage insurance.
Margin: The margin refers to the spread added to the loan’s index value.
Max 1st Adjustment: On hybrid loans such as the 5 year fixed, it is common to have a maximum first adjustment higher than the periodic cap. Max 1st adjustments can vary greatly and determine whether a particular loan is advantageous.
Periodic Cap: On adjustable rate loans and hybrid loans the periodic cap refers to the maximum increase or decrease allowed at each adjustment period.
Points: A point is one percent of the loan amount. Points represent pre‐paid interest. Generally, the higher the points the lower the rate and APR. “See Paying Points section of this Booklet”.
Term: The term is the life of a loan. Most often a loan will be amortized over the term repaying a portion of interest and principal at each period.