Get it in Writing
Probably the biggest complaint we have received, over the years that we have been in business, is a misunderstanding between the lender and the mortgagee. Our best advise is to always get everything in writing. Especially if you have a specific main concern(s). Verbal promises mean little.
Locking the Rate
When to lock the rate is a personal decision, but remember if you are tight on qualifying an unforeseen rate increase may stop you from qualifying for the loan. If you are comfortable with the current rate available and its monthly principal and interest payment, then locking the rate may make sense. On the other hand if you are willing to take a risk you can, in most cases, float the rate and lock at a later date. There are some lenders who offer "float down" options that lock the rate at application. If the lenders rate is lower at closing then you will get the lower rate. One last word on rate locks, if you do float and then decide to lock several weeks later, make sure to get a written confirmation of the interest rate that you will receive at closing. Get it in writing, via fax or drive to the lenders office and pick up a rate commitment in writing. The second biggest complaint that we have received over the years is a misunderstanding as to what the locked rate should have been. Due to the New TRID regulations closings may take longer and I suggest that you obtain a rate lock of 45 days if you will be locking the rate at application.
We have provided margins, caps and indexes on our ARM1, ARM 5/1 and ARM 7/1 mortgage rate pages. What do these terms mean? The margin usually runs between 2.25 and 3.0 percent and is an add on factor to the "U. S. Treasury Security adjusted to a 1 year constant maturity" (TS) or LIBOR (LIB) 1 year Index.
On the anniversary of the ARM the lender will take the current TS or LIB Index, rounded up to the nearest 1/8 of 1%, add the margin and establish the new rate. The annual cap may stop the adjustment below this figure. The caps, usually 2% annually and 6% lifetime, mean that the interest rate can not adjust up or down more than 2% with each adjustment and the lifetime cap means that the rate can never go higher than 6% above the initial interest rate given at closing. The index is usually the London Interbank Offered Rate (LIBOR)(LIB). Another index is the "U. S. Treasury Security adjusted to a 1 year constant maturity" (TS). This index is interpolated by the U. S. Treasury from the daily curve yield, this curve, which relates the yield on a security to its time to maturity. Most but not all ARMs' use one of these two indexes. Just one more word about ARM loans. They make a great deal of sense in certain cases. If you are buying a little more home than you can afford, but know your income will be increasing, than the initial lower rate of an ARM may be needed to help you qualify for the loan. Another case is when you know you will only be in the home for 3 years or less, then even in a worse case scenario your interest rate will most likely average at or below the rate that you could have had with a fixed rate loan.
The APR (Annual Percentage Rate) is a calculated figure required by "Regulation Z Truth in Lending". There is generally a lot of confusion among the public when it comes to APR's. To keep it simple, when a lender loans you money there are costs involved, for example, underwriting fees, points, pre-paid mortgage interest and several other fees. The lender has to calculate these costs into the loan. That means that because there are up front fees at closing these fees must be included into the calculation of the APR. Yes your mortgage payment is being calculated on your closing rate, the APR figure is higher because of the up-front costs to get the loan. I hope that helps make the APR a little clearer.
The tips and comments in this tip sheet are those solely of Residential Mortgage Consultants, Inc., and do not necessarily reflect the views of our lender base.