Mortgage Industry FAQ – Part 2


Q21.   What is meant by the term rate lock?

A.   A rate lock ensures the borrower immunity from fluctuations in the financial market. A person taking a loan may opt to lock the interest rate for a certain period. In such a case, the rate of interest remains constant provided there is no change to the loan within that period. This procedure is called locking.

Q22.   What is floating?

A.   Floating is the opposite of locking. For a floating loan, the rate of interest varies with the changeability of the market. Floating ensures a benefit that if the rates of interest were to fall the borrower would have to pay a lower interest rate.

Q23.   When can locking be performed?

A.   Locking the rate of interest can be executed until ten working days from the time of locating or refinancing a property.

Q24.   What are the fees for locking?

A.   The fees for locking are not constant. They are different for different types of loan products. Additionally, diverse lenders offer various locking rates.

Q25.  What is a fixed rate mortgage?

A.   In a fixed rate mortgage, the rate of interest and the monthly payments of PMI are fixed. They are generally high. Fixed rate mortgages are to be had for 10, 15, 20, 25, 30 and 40 years. Usually, the shorter the period of the loan, the lesser is the rate of interest. Mortgage periods of 15 and 30 years are the most popular.

Q26.   What are the advantages of fixed rate mortgages?

A.   Fixed rate mortgages are very stable. The owner is protected against the rise of rates. The mortgage payments remain fixed for the entire period of the loan.

Q27.   What are the shortcomings of a fixed rate mortgage?

A.   The rates of interest are very high. The monthly mortgage payments may be difficult for those individuals who have not established themselves financially. The initial monthly payments are particularly steep since higher interest rate applies to a higher principal. The rate of interest for the loan would not fall, if the market rates were to drop.

Q28.   What is an adjustable rate mortgage (ARM)?

A.   In an adjustable rate mortgage, the interest rate and monthly payments vary during the term of the mortgage. A factor called the index is defined at the point of application for the mortgage. The rate of interest is adjusted periodically, subject to the changes in the index defined.

Q29.   Does an adjustable rate mortgage have an edge over a fixed rate mortgage?

A.   The initial rate of interest for an adjustable rate mortgage is lower than that for a fixed rate loan. This may be maintained for a year or so.

Q30.   What is a negatively amortizing loan?

A.   Some adjustable rate mortgage (ARM) loans provide ceilings on monthly payments instead of caps on interest rates. This puts a limit on the increase of monthly payments. In such a case, the loan is amortized negatively. If the increase in the rates of interest is such that the monthly payments do not take care of the interest, the interest is added to the loan. You may however, choose to pay the additional amount incurred by the rising interest rate so that the loan does not increase.

Q31.   What are the advantages of negatively amortizing loans?

A.   A benefit of negatively amortizing loans is that you may choose to make low monthly payments over a long period. You must make certain that such a payment procedure is suitable for you. In addition, many adjustable rate mortgage loans offer low rates of interest, to begin with.

Q32.   How do the interest rates vary for adjustable rate mortgage loans?

A.   The rate of interest for adjustable rate mortgage (ARM) loans may vary every month, every three months, every six months, every year, every three years or five years. A loan with a variable period of one month is termed a 1-month ARM. For negatively amortized loans, the rate of interest can change every month.

Q33.   What are option ARM loans?

A.   An option ARM loan does not require setting monthly payments. The borrower makes the first payment and can choose from four options for the subsequent payments. In the first option, the lender sends a monthly statement requesting a minimum payable amount. The second option provides for payment of interest only. The third and fourth options call for a 15- year and a 30- year amortized payments respectively.

Q34.   What are hybrid loans?

A.   Hybrid loans are a combination of a fixed rate mortgage and adjustable rate mortgage (ARM) loans.

One type of a hybrid loan is the fixed period ARM. A homeowner availing of this category may make fixed payments for three to ten years, after which the initial rate of interest changes every year. The benefit of this loan is that the rate of interest is less than that for a long-term fixed loan. Additionally, the rate is fixed for a length of time. A second type is called the two-step mortgage. This loan has a fixed rate of interest for a specified period of about 5 to 7 years, after which the rate changes to the current rate determined by the market. The newly adjusted rate becomes fixed for 23 to 25 years.

Q35.   What is a convertible ARM?

A.   Some adjustable rate mortgage loans may be converted into fixed rate loans during the first five years. This is generally done when the rates begin to increase. The feature enables the borrower to pay fixed rates for the subsequent years.

Q36.   Is there a fee for conversion?

A.   The ARM loan is converted to a fixed rate loan for a token fee. The hitch is that the new rate is slightly higher than the current market rate.

Q37.   What are balloon loans?

A.   Balloon loans are fixed rate loans for a short period of 3, 5 or 7 years. Fixed monthly payments have to be made and after the end of the period, a lump sum has to be paid.

Q38.   What are the benefits and drawbacks of balloon loans?

A.   A balloon loan has a benefit that the rate of interest is lower than that for 15- or 30-year mortgage loan. This implies that monthly payments are low. A shortcoming of the balloon loan is the necessity of a lump sum payment towards the end of the specified term.

Q39.   What is a fixed rate loan with rate reduction option?

A.   This is a convertible mortgage program, in which you are allowed the option of reducing your rate of interest for the loan from the closing time rate if the market rate for the interest falls. There is a small conversion fee.

Q40.   What is a graduated payment mortgage?

A.   In this category of mortgage, the monthly payments are low, initially. The payments increase in a gradual fashion at previously fixed times. The monthly payments towards the end of the period are quite substantial to make up for the lower initial payments. The loaned amount is amortized negatively in the beginning but will have to be paid off at a fast pace towards the end of the term.


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