FIXED RATE

This program offers an interest rate which does not vary throughout the term of the loan. The term is most commonly a 30 year, but can also be a 20, 15 or even 10 year term The borrower can expect the same monthly payment for the term of the loan. The exception to this, is if the payment includes impounds for taxes and insurance, a variance in the payment can occur due to an increase/decrease in the property taxes or property hazard insurance. (Top of page)

2,3,5,7,10 ADJUSTABLE RATE MORTGAGE (ARM)

A type of mortgage loan in which the interest rate is fixed for a specified period of time. After that time, the rate is adjusted, increase or decrease, periodically (usually annually) according to a preselected Index (such as the Treasury Bill or the LIBOR). As the index rises, so will the loan's interest rate, and therefore the monthly payments. ARM's. These can be denoted in one of two ways:

• 2/28 ~ a 2 year fixed loan with a variable rate for the remaining 28 years
• 2/1 ~ a fixed rate for 2 years then adjusting once a year thereafter

• Index ~ the benchmark used to adjust the interest rate
  • US Treasury Bill
  • LIBOR
  • One other
• Margin ~ the % added to the index to deteremine the new adjusted rate
• Interest Rate ~ add the margin to the index.
• Cap ~ the limit that the interest rate can change either during the adjustment period, or the life of the loan
• Adjustment Period ~ deteremines how often the rate can change (ie once a year) (Top of page)

INTEREST ONLY

Payments cover the interest on the loan. The principal is never touched. This offers the benefit of lower monthly payments, however it does not reduce the balance of the loan. (Top of page)

5/25, 7/23 BALLOON

This is a short term loan (typically 5 or 7 years). The payment amount is based on a 30 year loan calculation. When the term is up, payment in full of the balance is required. Some of these programs offer a conversion program allowing the refinance of the loan at the end of the term. This generally requires an additional fee. The interest rate will be based on the market conditions at the time of the refinance. (Top of page)

NEGATIVE AMORTIZATION

Some loans allow the payment to be less than the interest accruing on the loan. This offers the lowest payment to the borrower. The disadvantage being that the unpaid interest is being added to the loan amount. This can cause the potential of owing more on the property than the market value of the home. (Top of page)

PRE PAYMENT

This option requires a loan to be open a specified period of time (ex 2, 3 or 5 years). If the loan is paid off early, a financial penalty will be added to the payoff amount (aprox 6 months worth of interest). There are two types of prepayment penalties

• Soft prepayment ~ the penalty will only be assesed if the loan is refinanced. If the borrower sells the property,there will be no penalty
• Hard Prepay ~ the penalty will be assesed regardless of refinance or sale of property(Top of page)