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Actually, M.D. DID get it right, he/she just didn't clarify it very well.
With the MTA Option ARMs that I offer, if you read the promissory note, you
will see that the first month payment IS a fully amortized payment at the
start rate, but only for the first month. In month two, the fully indexed
rate kicks in, as does neg-am.
But, I am a direct lender (not a broker), and I acknowledge that some
programs may be different. Also, we offer a 40-year amortization, which
reduces the amount of neg-am every month.
Since I am on my soap box, we also offer a fixed minimum payment for
five-years, and a fixed-payment/fixed-rate, for five years. Of course those
benefits are reflected in the start-rate and margin. Lastly, we offer these
loans with LPMI.
For you brokers, I believe that these programs are offered through our
wholesale lending division, ABC (American Brokers Conduit,
(www.abconduit.com). If you're interested, go take a look.
"Jeff Strickland" <crwlr@yahoo.com> wrote in message
news:JdmdnXVuCa61RP7ZnZ2dnUVZ_v2dnZ2d@ez2.net...
>
> "M.D." <delanuel@bellsouth.net> wrote in message
> news:49M8g.20865$Sl4.6632@bignews1.bellsouth.net...
>> Something for the newbies (im one of them, lol) in the mortgage industry,
>> hope this helps:
>>
>>
>> *************************************
>> How Does an Option ARM Loan Work?
>>
>> Option ARM (also called Pick A Payment or Pay Option ARM) loans work by
>> providing the borrower with four payment options each month.
>>
>> Before we get into the payment options, let's review some of the
>> important terms and concepts involved with this loan program.
>>
>> ARM - Adjustable Rate Mortgage. An ARM is a mortgage whose interest rate
>> is raised or lowered at periodic intervals according to the prevailing
>> interest rates in the market. Also called variable-rate mortgage.
>>
>> Principle - The original amount of money provided in a loan is the
>> principle. This amount, plus the interest accrued must be paid back in
>> full by the end of the loan's term.
>>
>> Interest - Interest is the cost paid to borrow the money.
>>
>> Start Rate - The initial rate of the mortgage. This rate is the rate that
>> the "minimum" payment option is based on. Typically this rate will range
>> from 1-2%.
>>
>> Amortization - The process of paying down the principle balance of a
>> loan. A fully amortized loan is a loan that will be paid off completely
>> through the monthly payments by the end of the loan's term.
>>
>> Negative Amortization - Negative Amortization or "neg am" is the process
>> of adding unpaid interest to the principle balance of the loan. If you
>> make a "minimum payment," the difference between that payment and the
>> interest only payment will be added to the principal balance of your
>> loan.
>>
>> Index - An index is a measure of a particular security or other monetary
>> instrument that can be used to adjust interest rates. Index examples
>> include US Treasury Bond valuations, LIBOR (London Inter Bank Offering
>> Rate), COFI (Cost of Funds Index), and MTA (Monthly Treasury Average).
>> Indexes can adjust on a daily basis.
>>
>> Margin - Margin is the difference between the Index and the rate on a
>> loan.
>>
>> Fully Indexed Rate - The fully indexed rate is calculated by adding the
>> Index to the Margin. For example, if Libor was 3.0% and the margin on the
>> loan was 2%, the fully indexed rate would be 5% (Index + Margin). The
>> fully indexed rate is the rate that your loan accrues interest at.
>>
>> Now that we've covered the basic terms, let's examine the four payment
>> options
>>
>> These payment options are:
>>
>> 1) Minimum Payment
>>
>> This payment is a 30 year amortized payment based on the start rate of
>> the loan. When the minimum payment is made, the difference between the
>> minimum payment and the interest only payment is added to the principle
>> balance of the loan.
>>
>
> You were doing pretty good up to here. There are two sentences here, the
> first is patently wrong, the second is correct. There is no amoritization
> that happens, except for negative amoritization, with the minimum payment.
> The minimum payment typically won't even pay the current interest that is
> due on the note, and the shortfall is added to the back end of the loan as
> a negative amortization. The negative will not be allowed to exceed 125%
> of the original loan amount.
>
>
>
>> This payment is lowest possible payment and lets you keep more cash in
>> your pocket each month. This payment typically changes annually and is
>> recalculated based on the remaining principal balance of the loan, the
>> remaining loan term, and the current interest rate. A payment cap is
>> usually applied to ensure that they payment does not swing wildly from
>> year to year. A typical payment cap is 7%. For example, if your minimum
>> payment was $1,000 in year one, the most it would be in year two is
>> $1,070 and the least it would be is $930.
>>
>> 2) Interest Only Payment
>>
>> This payment is based on the fully indexed rate. These payments don't
>> pay down the principal balance of the loan.
>>
>> In order to avoid deferred interest and negative amortization, each month
>> you will be given the option to make an interest only payment. This
>> allows you the benefit of keeping a low monthly payment and keeps the
>> principal balance of your loan at the same amount.
>>
>> 3) 30 Year Fixed Payment
>>
>> This payment is based on the fully indexed rate. These payments do pay
>> down the principal balance of the loan.
>>
>> It's calculated each month based on the prior month's interest rate, loan
>> balance and remaining loan term. When you choose this option, you reduce
>> your principal and pay off your loan on schedule.
>>
>> 4) 15 Year Fixed Payment
>>
>> ly indexed rate. These payments do pay down principal balance of the
>> loan.
>>
>> If you want to build equity faster, pay off your loan quicker and save on
>> interest, this is the option for you. It's calculated to amortize your
>> loan based on a 15-year term from the first payment due date.
>>
>> Let's take a look at a couple of examples.
>>
>> Example 1:
>>
>> $250,000 Loan Amount - 1.25% Start Rate - 5.5% Fully Indexed Rate
>>
>> Payment #1 (Minimum Payment) - $833.13
>> Payment #2 (Interest Only Payment) - $1,145.83
>>
>>
>> Example 2
>>
>> $450,000 Loan Amount - 1.25% Start Rate - 5.5% Fully Indexed Rate
>>
>> Payment #1 (Minimum Payment) - $1,499.63
>>
>>
>> As you can see, there can be quite a difference between payment options!
>>
>> If you want to run your own scenarios, We've built a simple, Excel based,
>> Pay Option Calculator that you can download for free. Check out the
>> resource box below for information on how to download this great little
>> tool.
>>
>> Hopefully, this gave you some insight into what an Option ARM loan is and
>> how it works.
>>
>> If you are interested in learning more about this program, and if you are
>> eligible for it, your next step should be contacting a mortgage
>> professional.
>>
>> IMPORTANT NOTICE
>>
>> Beware companies or individuals that make you put money down or order an
>> appraisal BEFORE they agree to discuss your situation with you. Also, be
>> wary of those who won't talk to you until they pull your credit report.
>> While a credit report will be necessary if you decide to go forward, you
>> have the right to talk to someone about your options before they look at
>> your credit. These are frequently just sales tactics to make you feel
>> like you are obligated to go forward with that particular broker or
>> lender.
>>
>> Joe Ramirez and HomeLoanInfoCenter.net put today's confusing loan
>> programs into easy to understand terms. Run your own loan scenarios with
>> a free copy of our Pay Option ARM Calculator.
>>
>> Article Source: http://EzineArticles.com/?expert=Joe_Ramirez
>>
>>
>>
>>
>
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Re: Secrets of the Option ARM Loan (Newbie Guide)
