With a fixed rate loan, the interest rate stays constant during the life of the loan. With an adjustable rate mortgage (ARM), the interest changes periodically, typically in relationship to an index (LIBOR, Treasury, COFI). The monthly payment that you make with a fixed rate mortgage is relatively stable; payments on ARM loans will change (monthly, semi-annually, or annually). There are advantages and disadvantages to each type of mortgage; the best way to select a loan product is to talk to us. Let us help you decide which loan fits your lifestyle or financial goals. Simply call or email.

How is an index and margin used in an ARM?

An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).

How much house can you afford?
Before starting serious house hunting, it is a good idea to get an estimate of how much house you can afford. Review some of the basic concepts below, contact us, or try one of the mortgage calculators on our website.

• Down Payment
  Most mortgages require at least a minimum down payment of the house purchase price. There are many great programs that require as little as a 5% down payment. There are 100% financing loans or no money down loans available, but in most cases they will carry a slightly higher interest rate.

• Debt to Income Ratio (DTI)
  Generally, your proposed housing payment should not exceed 28% to 35% of your gross monthly income. Your total long term debt (including the proposed housing payment) should not exceed 35% to 40% of your gross monthly income. Long-term debt includes school loans, car loans, credit cards, alimony/child support, etc. There are lenders that allow for higher DTI ratios, however your interest rate will also be higher.

• Total Monthly Payment (PITI)
  It is important to keep in mind that your monthly housing payment includes more than the loan for the property. It includes principal, interest, property taxes, HOA fee, and home owner's insurance.

• Closing Costs
  In addition to the down payment, there are a number of other expenses when you finalize or close the purchase on your property. These other costs may include: points (fees paid to the lender for lower interest rates), prepaid property taxes, title insurance, private mortgage insurance (PMI), property appraisal, credit report, underwriting fees, homeowners insurance, state transfer tax, and closing/attorney fees. The amount of closing costs can vary a great deal depending on the type of mortgage program you have. It is best to discuss these costs with your loan officer asking for a Good Faith Estimate (GFE).

• Pre-approved and Pre-qualified
  Visiting your mortgage lender early in the house hunting process is a good idea. After looking at your financial materials, the lender can pre-qualify you, which means he gives you an estimate of how much house you may be able to afford. Pre-approval takes this one step forward by actually submitting your full loan application. Once this is accepted, you know for sure how much you can spend on a house. Pre-approval also speeds up the house buying process when you finally make a decision. Simply complete the online application and get started on the pre-approval process.

The amount of cash that is necessary depends on a number of items. Generally speaking, you will need to have money for the following:

• Earnest Money - The deposit that is supplied when you make an offer on the house. This money is put into an escrow account and may be used to cover your down payment or closing costs.

• Down Payment - A percentage of the cost ot the home that is due at closing.

• Closing Costs - Costs associated with processing paperwork to purchase or refinance a house.

There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your home. We can help you evaluate your choices and help you make the most appropriate decision.