Posted on: 25th Apr, 2007 05:31 am
i am not clear with the types of mortgages that i am being offered. let me explain my situation. i received a commitment letter stating that i am approved for a mortgage (though i filed bankruptcy 3 years ago but my spouse who is co-borrower has excellent credit – about 720), 2/28 fixed/arm with 5 year interest-only period. the loan was expected to adjust after each half-year which i did not like as i had different financial goals. i was expecting to deal with the loan only for 5 years minimum as i would be paying off the car in 3 years and the bankruptcy would be erased from my credit report in 7 years. i am thinking of building my equity and refinancing in the 5 year itself with a lower rate. but i want to know more about the type of loan offered to me and if it can really help me build equity? what are the pros and cons? some other company offered me 30 year fixed with 5 year interest-only. pls explain this type of loan and can i refinance any interest only loan
Hi Danelle,
Welcome to Mortgagefit forum.
"I received a commitment letter stating that I am approved for a mortgage (though I filed bankruptcy 3 years ago but my spouse who is co-borrower has excellent credit – about 720), 2/28 fixed/ARM with 5 year interest-only period."
The loan offer you have received is an adjustable rate mortgage of 30 year term with the rate for the first 2 years being fixed but will start to adjust each year after the first fixed period (of 2 years) is over.
But what rate are you getting for this loan? The payments on this will be only interest only payments for the 1st 5 years within which you are planning to refinance to get better terms.
Can you give more details on what you meant by:
"The loan was expected to adjust after each half-year which I did not like as I had different financial goals."
As this loan would not be adjusting every half year.
Colin
Welcome to Mortgagefit forum.
"I received a commitment letter stating that I am approved for a mortgage (though I filed bankruptcy 3 years ago but my spouse who is co-borrower has excellent credit – about 720), 2/28 fixed/ARM with 5 year interest-only period."
The loan offer you have received is an adjustable rate mortgage of 30 year term with the rate for the first 2 years being fixed but will start to adjust each year after the first fixed period (of 2 years) is over.
But what rate are you getting for this loan? The payments on this will be only interest only payments for the 1st 5 years within which you are planning to refinance to get better terms.
Can you give more details on what you meant by:
"The loan was expected to adjust after each half-year which I did not like as I had different financial goals."
As this loan would not be adjusting every half year.
Colin
"I am thinking of building my equity and refinancing in the 5 year itself with a lower rate. But I want to know more about the type of loan offered to me and if it can really help me build equity?"
Instead of a 2/28 arm you can also look for a 5/1 arm with IO option where the rate will be fixed for the first 5 yrs. and then start to adjust.
Instead of a 2/28 arm you can also look for a 5/1 arm with IO option where the rate will be fixed for the first 5 yrs. and then start to adjust.
"I am thinking of building my equity and refinancing in the 5 year itself with a lower rate. But I want to know more about the type of loan offered to me and if it can really help me build equity? what are the pros and cons?"
Danelle,
If you make interest only payments then equity will not be built. The reason is that in other type of mortgages your monthly mortgage payments include interest as well as principal payments. So as you continue making the payments principal loan amount also decreases with time and you build up equity in your home. In I-O payments, principal remains the same as you only make the interest payments and thus there is no reduction in the original mortgage principal.
In one situation equity will develop even with I-O payments if the house appreciates in value but it may also happen that market value of your house goes down!
Miller
Danelle,
If you make interest only payments then equity will not be built. The reason is that in other type of mortgages your monthly mortgage payments include interest as well as principal payments. So as you continue making the payments principal loan amount also decreases with time and you build up equity in your home. In I-O payments, principal remains the same as you only make the interest payments and thus there is no reduction in the original mortgage principal.
In one situation equity will develop even with I-O payments if the house appreciates in value but it may also happen that market value of your house goes down!
Miller
Hi Danelle,
A 2/28 fixed/ARM is an option which offers you a fixed rate of interest for the first 2 years and includes a 2year pre-payment penalty. This kind of loan is often offered to those who have credit problems.
The interest-only option allows you to pay only interest for 5 years but then it does not help you to build much equity (difference between the appraised home value and the principal balance). This is because, if you do not pay principal for the first 5 years, you cannot reduce the principal balance and hence less equity. Also, your equity will grow if there is an increase in your appraised value which is to some extent dependent on the home sale value in the neighborhood.
However, at the end of the 2 year period, the loan will be concerted into an ARM which adjusts after every 6 months. You need to get information on the index of the ARM, the margin and the rate cap. This will help you to decide whether you should go for this option based on the calculated monthly payments.
Hope this helps...
God bless you.
Samantha
A 2/28 fixed/ARM is an option which offers you a fixed rate of interest for the first 2 years and includes a 2year pre-payment penalty. This kind of loan is often offered to those who have credit problems.
The interest-only option allows you to pay only interest for 5 years but then it does not help you to build much equity (difference between the appraised home value and the principal balance). This is because, if you do not pay principal for the first 5 years, you cannot reduce the principal balance and hence less equity. Also, your equity will grow if there is an increase in your appraised value which is to some extent dependent on the home sale value in the neighborhood.
However, at the end of the 2 year period, the loan will be concerted into an ARM which adjusts after every 6 months. You need to get information on the index of the ARM, the margin and the rate cap. This will help you to decide whether you should go for this option based on the calculated monthly payments.
Hope this helps...
God bless you.
Samantha
You need to keep looking at lenders. From what you described, the loan officer you are working with is only considering sub-prime loan programs for you. There are other options despite your bankruptcy.
Many 2 year fixed rate loans (2/28 with 5 year interest-only periods) are written with 5 year pre-payment periods, not 2 years. That means you could be financially stuck in a loan with increasing interest rates.
Coming out of a bankruptcy I think you should consider a loan with more stable monthly payments. It doesn't have to be a 30 year fixed, perhaps a 5 year fixed would work. Interest only features allow you to make a smaller monthly payment but don't build any equity. If you utilize an interest only loan just to be able to qualify then you are basically leasing the home with full resopnsibility for repairs. You might as well rent from someone else in my opinion.
good luck but keep on shopping around. I think you can do better. Also, ask the loan officer to explain why an FHA loan wouldn't work for your situation.
Many 2 year fixed rate loans (2/28 with 5 year interest-only periods) are written with 5 year pre-payment periods, not 2 years. That means you could be financially stuck in a loan with increasing interest rates.
Coming out of a bankruptcy I think you should consider a loan with more stable monthly payments. It doesn't have to be a 30 year fixed, perhaps a 5 year fixed would work. Interest only features allow you to make a smaller monthly payment but don't build any equity. If you utilize an interest only loan just to be able to qualify then you are basically leasing the home with full resopnsibility for repairs. You might as well rent from someone else in my opinion.
good luck but keep on shopping around. I think you can do better. Also, ask the loan officer to explain why an FHA loan wouldn't work for your situation.
Yes, I do feel that a loan with stable payments can help Danelle as far as his financial situation is concerned. He can go for a fixed rate loan having a repayment period of 5 years as after that Danelle would like to move out.
However, the interest-only feature can be an advantage for a borrower considering the fact that the lower payments will help him keep aside extra cash for other expenses. But then, if building up equity is the priority, then it is better to leave out the interest-only option and simply go for a 5 year loan.
Good luck Danelle
However, the interest-only feature can be an advantage for a borrower considering the fact that the lower payments will help him keep aside extra cash for other expenses. But then, if building up equity is the priority, then it is better to leave out the interest-only option and simply go for a 5 year loan.
Good luck Danelle
ARM Products usually have low interest rates as compared to a Fixed product i.e. 30 YR FIXED Product.
Simple reason a Lender guarantees a Rate of Interest for a total term of 30 Years without thinking of the future market condition, but in a ARM Product the Rate of Interest varies based on its INDEX i.e. LIBOR / COFI / MTA / CMT / T-BILL.
So, if you have set your goals for the next 5 Years or have any other important tasks which need attention then I will suggest you to go for a FIXED PRODUCT. Because for the entire term you will be rest assured that the Rate of Interest will not change.
If you opt for a FIXED Product then check the following options with your Lender :
1.) 30 YEAR FIXED PRODUCT - Full Amortization
which Principle and Interest payments every month.
2.) 30 YEAR FIXED PRODUCT - Interest Only for 5 or 10 or 15 Years.
This product offers Interest Only Payment for the specified terms but
after that Amortizes fully for the remaining term.
Let me know if you have any doubts on ARM Products also.
Regards
Sagar
Simple reason a Lender guarantees a Rate of Interest for a total term of 30 Years without thinking of the future market condition, but in a ARM Product the Rate of Interest varies based on its INDEX i.e. LIBOR / COFI / MTA / CMT / T-BILL.
So, if you have set your goals for the next 5 Years or have any other important tasks which need attention then I will suggest you to go for a FIXED PRODUCT. Because for the entire term you will be rest assured that the Rate of Interest will not change.
If you opt for a FIXED Product then check the following options with your Lender :
1.) 30 YEAR FIXED PRODUCT - Full Amortization
which Principle and Interest payments every month.
2.) 30 YEAR FIXED PRODUCT - Interest Only for 5 or 10 or 15 Years.
This product offers Interest Only Payment for the specified terms but
after that Amortizes fully for the remaining term.
Let me know if you have any doubts on ARM Products also.
Regards
Sagar
From what the OP has shared, I am hard pressed to say that he wouldn't be better served going FHA...
You are not going to get slammed on the rate, you'll be spared of a prepayment penalty and when you are ready to refi, you can do what is essentially the equiv. to a NO DOC (streamline refinance) submission without appraisal.
Even if the OP doesn't get AU approval, he could still get a FHA 30 YR FXD in the low to mid 7s going manual...
Regards,
Scott Miller
You are not going to get slammed on the rate, you'll be spared of a prepayment penalty and when you are ready to refi, you can do what is essentially the equiv. to a NO DOC (streamline refinance) submission without appraisal.
Even if the OP doesn't get AU approval, he could still get a FHA 30 YR FXD in the low to mid 7s going manual...
Regards,
Scott Miller
"From what the OP has shared" what is OP?
Hey Adrin,
I feel Scott Miller want to say different loan options shared by other members by the term OP.
I feel Scott Miller want to say different loan options shared by other members by the term OP.
Hi all,
By OP, most probably Scott is referring to the optionee or Danelle who has posted the query. Considering the information Danelle has shared with us, Scott means to say that FHA loan will not be a suitable option for him. Isn't it so Scott?
Sara
By OP, most probably Scott is referring to the optionee or Danelle who has posted the query. Considering the information Danelle has shared with us, Scott means to say that FHA loan will not be a suitable option for him. Isn't it so Scott?
Sara
OP must be original poster :)
Danelle,
In comparing the two loans (2/28 arm 5yr IO vs 30 yr fixed 5yr IO), the fixed rate product is a much better loan since you expect that you will be in the loan for a minumum of 5 yrs.
2/28 Arm 5 yr IO
The first two years might be great with this loan. However, after 2 years, you will most likely have a 3% interest increase. At 2 1/2 years it could have another increase of 1%. Multiply the rate increase by the loan amount divided by 12 for an idea of the monthly payment increase. (ie. $200,000 x 0.03 / 12 = $500 increase in monthly payments :o ) After 5 years you will then have an increase in payments because you now paying on the principal.
30 Fixed 5 year IO
This loan will only have one payment adjustment. That adjustment come at 5 years when you start to pay principal. The rate on this loan should only be 1/2% than the ARM's start rate. However, the ARM will cost 2 1/2% higher at the first adjustment.
My suggestion would be to take the 30 year fixed 5 year IO product. After you pay your car off in 3 years, devert those funds to paying down your principle.
Quinton Pettiford
'Cut Off Your ARM'
In comparing the two loans (2/28 arm 5yr IO vs 30 yr fixed 5yr IO), the fixed rate product is a much better loan since you expect that you will be in the loan for a minumum of 5 yrs.
2/28 Arm 5 yr IO
The first two years might be great with this loan. However, after 2 years, you will most likely have a 3% interest increase. At 2 1/2 years it could have another increase of 1%. Multiply the rate increase by the loan amount divided by 12 for an idea of the monthly payment increase. (ie. $200,000 x 0.03 / 12 = $500 increase in monthly payments :o ) After 5 years you will then have an increase in payments because you now paying on the principal.
30 Fixed 5 year IO
This loan will only have one payment adjustment. That adjustment come at 5 years when you start to pay principal. The rate on this loan should only be 1/2% than the ARM's start rate. However, the ARM will cost 2 1/2% higher at the first adjustment.
My suggestion would be to take the 30 year fixed 5 year IO product. After you pay your car off in 3 years, devert those funds to paying down your principle.
Quinton Pettiford
'Cut Off Your ARM'
I agree with you Quinton. A fxd rate would be more suitable for him instead of a 2/28 arm. Rates can go real high for arm loans in future and it is more suitable for someone with the kind of financial profile Danelle has to select a frm loan.
Niicss
Niicss
Danelle,
Generally the adjustable rate loans are not discounted enough in this market to make them attractive. Your most likely better off with a fixed rate. Please look at FHA programs, even if you have had a past bankruptcy.
Mike Snider
Generally the adjustable rate loans are not discounted enough in this market to make them attractive. Your most likely better off with a fixed rate. Please look at FHA programs, even if you have had a past bankruptcy.
Mike Snider