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Liberty Mortgage, Inc.
509 W. McKinley Avenue
Mishawaka, Indiana 46545
Telephone 257-0629
or 888-568-1786
Fax 574-257-0632
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Understanding Loan Products
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Numerous types of loan products are available to borrowers today. They break down into two basic catagories
- fixed rate and adjustable rate mortgages.
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Fixed Rate Mortgages
Fixed rate mortgages have been around the longest. People generally have
more experience with this type of mortgage. Very simply stated, fixed rate mortgages have an interest
rate and monthly payment that remain the same over the term of the loan, regardless if that term is for
10, 15, 25 or 30 years.
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Adjustable Rate Mortgages
The second type is the adjustable rate mortgage (ARM). ARMs have an
interest rate that increases or decreases over the life of the loan based upon the interest rate environment.
Since their introduction in response to unprecedented high interest rates of the early 1980's, ARM loans
have developed into the most diverse group of mortgages ever created. The description provided in this
handbook provides a very basic overview of some of the major components of an ARM. For a detailed discussion
of the program that will best meet your needs, please give us a call. For many home buyers today, an
ARM is the best mortgage option.
ARM loans are typically named according to their adjustment interval.
For example: a 3/1 ARM is fixed for the first three years and then becomes a one-year ARM for the remainder
of the 30 year term.
ARMs with initial fixed periods are very popular because they have a lower
initial interest rate than a 30-year fixed. This stability, coupled with the realization that the homeowner
may not have the mortgage for longer than the short fixed period, has added to their popularity.
When considering which type of ARM to get, you need to be aware of the factors that affect this type
of mortgage as described below:
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Index
The index is the financial instrument used as the foundation for determining future rates
as adjustments are made. There are several indexes that are used in the mortgage industry - T-Bill, LIBOR,
Prime and Cost of Funds.
Margin
The margin is the amount the lender adds to the index
to arrive at the adjusted rate to provide a satisfactory yield for his investment. Margins vary and can
be a key factor in selecting the right loan for you.
Caps
Arms have limits as to the
amount they are allowed to adjust at each interval or change period. This is called a cap. Caps can be
applied to the interest rate or the payments; this varies with the type of loan you choose.
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More about the loan process . . . .
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