RESOURCES FOR CONSUMER EDUCATION
Vallejo Neighborhood Housing Services
VNHS is a non-profit organization that offers low cost homebuyer education and credit counseling services. They also administrate several local homebuyer assistance programs.
**For information on more homebuyer assistance programs please call us at Consumer’s Choice Mortgage.
California Department of Real Estate Homebuyer’s Workbook
http://www.dre.ca.gov/prpqstguides.htm
Credit Scores and Credit Monitoring Program
Credit scores, commonly referred to as FICOs, are used by many lenders as a numerical estimate of your credit worthiness. The idea behind them is that the higher your score, the more likely you are to repay your loan on time. There are three major credit bureaus in the United States that collect data and generate credit scores-- Experian, TransUnion and Equifax. Each company uses a propriety mathematical formula that takes into account factors like how much credit you have available, how much debt you are currently carrying, or how long you have been paying on a current loan. Because the formula used by each company is unique, your scores may vary from bureau to bureau. For this reason, lenders typically toss out the highest and lowest, and use the middle score for qualifying.
While many loans have minimum credit score requirements, know that credit scores are just one factor in qualifying for a home loan. As a mortgage brokerage, Consumer’s Choice Mortgage has many lenders and programs available for our clients over a broad range of credit profiles.
It is important to check your credit report regularly so that you can be aware of any errors showing and address them immediately. Checking your credit is also the best way to be certain that no one has stolen your identity. California is #2 in the nation for instances of identity theft, so this is a problem to be taken seriously. Identity theft is really not something you want to discover when you are attempting to refinance or purchase a home, so to help out our friends and clients we offer a FREE credit report monitoring program. We will pull a one bureau credit report every 6 months so that you can know for sure what is showing up under your name and social security number. No charge- no strings attached. To join please give us a call or just complete the Credit Check Authorization form and fax it back.
For more information on credit scores, visit the Federal Trade Commission’s website (www.ftc.gov). You may also obtain a free report from each bureau once per year by going to www.annualcreditreport.com. However, be aware that the free reports do not come with credit scores, only with the report data.
Understanding Adjustable Rate Mortgages (ARM)
An Adjustable Rate Mortgage is a loan whose interest rate can change during the course of the loan. Depending on the current market conditions, these loans may begin with an interest rate that is 2-3 percent below the rate for a comparable fixed rate mortgage. This means that the initial payment on an ARM could be much lower than the payment for a fixed rate loan of the same amount. The consequence of the lower payment is that the borrower can then qualify for a larger loan.
However, the interest rate on an ARM will change. The rate adjusts at specified time intervals (for example, every 6 months) depending on the type of ARM, and is determined by market conditions at the time of the adjustment. If interest rates go up, your monthly mortgage payment will go up, too.
The most popular ARMs combine aspects of fixed and adjustable rate loans. They are called Fixed Period ARMs because the rate is fixed for a certain period at the beginning of the loan before it becomes adjustable. Typically the fixed period is either 2, 3, 5, 7 or 10 years, and then the loan is adjustable for the remainder of the 30 year term. This loan is a nice combination because it gives the borrower some security in the beginning of the loan, but also gives them the advantage of a lower starting interest rate.
RATE = INDEX + MARGIN
When the rate on the loan adjusts, the new rate will be based on the index (a financial variable) plus a fixed number called the margin. However, there is a limit to how much the rate can increase at any given time, as defined by the loan’s rate change caps. The index, margin, and caps, are all defined in the legal description of your loan, called the Note. Below are some definitions and examples.
Index - The index of an ARM is the financial instrument that the loan is "tied" to, and determines what the rate is adjusted to. The most common indices are the Prime Rate (set by the Federal Reserve Board), 1-Year Treasury, LIBOR (London Interbank Offered Rate), 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on the conditions of the financial markets.
Margin - The margin is one of the most important aspects of an ARM because it is added to the index to determine the interest rate that you pay. The index + margin = rate. While the index is a market variable, the margin is a fixed number—it is specified in the legal description of your loan and won’t ever change. For example, if the current index value is 5.50%, and your loan has a margin of 2.25%, your fully indexed rate is 5.50 + 2.25 = 7.75%.
Periodic Rate Caps - All adjustable rate loans carry periodic caps which set a limit on how much your rate can adjust at one time. Interest rate caps are beneficial in rising interest rate markets to protect the borrower from extreme increases, but can also keep the borrower’s interest rate from coming down as quickly if rates are falling rapidly. For example, if your starting rate is 5.5% and your loan has a periodic rate cap of 2%, at your first adjustment the highest the rate could possibly go is 5.5 + 2 = 7.5%, regardless of what the index + margin equals at that time. Likewise, the lowest the rate could go would be 5.5 – 2 = 3.5%.
Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or "negative amortization". These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Rate Caps - Almost all ARMs have a maximum interest rate the loan can reach over the lifetime of the loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.