Are you considering purchasing a new construction home?
Is an Adjustable-Rate Mortgage right for you?
When you shop for a mortgage, whether it’s for a new home or a refinance, you’ll soon hear about adjustable-rate mortgages (ARMs). For some, an adjustable-rate mortgage is an automatic no. If that is the case, it is usually for one of three reasons:
They’re uncomfortable with any risk;
They’re unaware of just how an ARM works;
They can predict the future with relative certainty.
While ARMs definitely have their advantages, make sure you understand them before getting into one.
How ARMs work
All ARMs start out as fixed-rate mortgages for the first 3, 5, 7, or 10 years. An ARM will appear like this, where the first number in the terms “3/1,” “5/1”, or “7/1” denotes the number of years that the rate will be fixed. Usually the lower the number is, the lower the initial rate. During the fixed period, there is no risk and typically a healthy savings. The second number shows how many years before the rates can be adjusted once that fixed period has expired.
After this fixed period, the rate can fluctuate. The rate itself is made up of both fixed- and variable-rate components. The variable component will be based on some index such as Treasury bonds. This is added to the fixed-rate component set by the lender when you determine your starting rate.
Your decision to obtain an ARM should be based on how long you plan to live in this home. Having reasonable expectations for future sale or refinancing is all it can take to make an ARM worth considering. If you believe that you could be living there for a long time, you may want to consider opting for a fixed-rate mortgage. The reason? If you have an ARM and have to refinance at some time in the future when rates are higher, you might find yourself in a fixed-rate mortgage with a much higher rate.
Lenders give you a discounted rate up front because they know the rate will float with the market later on. If you sell your home or refinance again prior to that happening, it’s their loss. You have the advantage here because you control the timing of your next step.
One way to prepare for the possibility of a higher rate and payment later is to pay extra principal each month to reduce your balance faster. If the rate ultimately adjusts up, your balance will be lower and the payment change will be less as a result. As well, you would already be accustomed to paying more.
The Bottom Line
A fixed-rate loan provides the certainty that it will never change. An ARM provides a guaranteed savings but for a limited period of time. The best way to decide is to balance your expectations for using any particular loan with the peace of mind that can come from being assured of stability, even if your timeframe changes.
Inlanta Mortgage NMLS 1016, 182565
Reverse Mortgage Loans
Reverse Mortgage loans give seniors the ability to live in their home, with no monthly mortgage payments¹, by converting home equity into cash while still maintaining ownership!
Home Equity Conversion Mortgages (HECMs), also known as reverse mortgage loans, were created over 25 years ago to help homeowners age 62 and older convert a portion of home equity into tax-free money.³
How does it work?
A reverse mortgage loan allows you to turn some of the equity in your home into cash to improve your financial situation. With a reverse mortgage loan, you will remain on title and can stay in your home without making monthly mortgage payments during the loan period.¹ The borrower will be required to pay for property taxes, home insurance and home maintenance. The loan balance becomes due upon the occurrence of other events including non-compliance with the loan terms.
This federally-insured loan offers multiple ways to receive the proceeds and gives you the ability to spend the cash as needed. Common uses of Reverse Mortgage loans include:
- Paying off debt
- Cover costly medical bills and prescriptions
- Home repairs and modifications
- Delay Social Security benefits²
- …and much more!
Important features of a reverse mortgage loan include:
- Proceeds from a Reverse Mortgage loan are tax-free³.
- There are multiple ways to receive the loan proceeds, either as a line of credit, a term payment, a tenure payment or lump sum.
- Live in your home with no monthly mortgage payments¹ .
- The borrower must be 62 years or older (a nonborrowing spouse may be under age 62)
- The home must be and remain the borrower’s primary residence
- The borrower must own the home
- The borrower must meet the financial requirements of the HECM program
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Already a customer and need help? Contact us.
¹If you qualify and your loan is approved, a HECM Reverse Mortgage must pay off your existing mortgage(s). With a HECM Reverse Mortgage, no monthly mortgage payment is required. Borrowers are responsible for paying property taxes and homeowner’s insurance (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must also occupy home as primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan becomes due and payable when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, or defaults on taxes and insurance payments, or does not comply with loan terms. Call 1-239-936-4232 to learn more. A Reverse Mortgage increases the principal mortgage loan amount and decreases home equity (it is a negative amortization loan). These materials are not from HUD or FHA and were not approved by HUD or a government agency.
²Social Security benefits estimator available at www.ssa.gov/estimator.
³Loan proceeds are paid tax-free; consult your tax advisor.
Top Workplace Award 2016
We are pleased to announce that Inlanta Mortgage has again been named a Top Workplace by theMilwaukee Journal Sentinel. 2016 marks the third consecutive year Inlanta has won the Top Workplace award.
Top Workplace Award Criteria
Top Workplace honors are awarded to companies whose employees have rated their companies highly in categories such as leadership, direction, ethics, culture, training and benefits. Top Workplace award winners do not know whether their employees have rated them favorably until a third-party, Workplace Dynamics, collects and reviews all results. This is the third year that Inlanta Mortgage has received the Milwaukee Journal Sentinel’s prestigious Top Workplace award.
In addition to being named a Top Workplace by the Milwaukee Journal Sentinel, Inlanta has been consistently recognized as one of the “50 Best Mortgage Companies to Work For” by Mortgage Executive Magazine and one of the country’s “Top Mortgage Employers” by National Mortgage Professional.
Our Mission Statement
Our mission is to be the home financing partner that you trust to serve your family, friends, and community. Through our family of dedicated mortgage professionals, our commitment is to deliver an exceptional experience. Our unwavering dedication to integrity, honesty, and ethics is the foundation of all of our relationships.
About Inlanta Mortgage
Headquartered in Brookfield, Wisconsin, Inlanta Mortgage is a growing mortgage banking firm committed to quality mortgage lending, ethical operations, and strong customer service.
Inlanta Mortgage offers Fannie Mae/Freddie Mac agency products, as well as a full suite of jumbo and portfolio programs. The company is an agency approved lender for Freddie Mac and Fannie Mae, FHA/VA, FHA 203K and USDA. Inlanta Mortgage also offers numerous state bond agency programs. Review Inlanta’s mortgage loan programs.
Inlanta Mortgage, Inc. NMLS #1016
Most people are surprised to learn what appraisers actually look at when determining the value of a real estate property.
A common misconception homeowners generally have is that the value of their home is determined after the appraiser has completed their physical property inspection.
However, the appraiser actually already has a good idea of the property’s value by the time they have scheduled an appointment to stop by the property.
The good news is that you don’t have to worry so much about pushing back an appointment a few days just to “clean things up” in order to help influence the value of your property.
While a clean house will certainly make it easier for the appraiser to notice improvements, the only time you should be concerned about “clutter” is if it is damaging to the dwelling.
The Key Components Addressed In An Appraisal
Location, view, topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features…
Quality of construction, finish work, fixed appliances and any defining features
Age, deterioration, renovations, upgrades, added features
Health & Safety:
Structural integrity, code compliance
Above grade and below grade improvements
Is the property conforming to the neighborhood?
Is the property functional as built – style and use?
Garages, Carports, Shops, etc..
Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.
When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.
Be sure to have all carbon monoxide and smoke detectors in working condition.
Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.
If you’re interested in what specifically appraisers are looking for, here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.
Related Update on HVCC:
Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.
This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans originated on or after May 1, 2009.
Related Appraisal Articles:
Hey, I gave my real estate agent a $5000 Earnest Money Deposit check… Where does that money go?
According to Wikipedia:
Earnest Money – an earnest payment (sometimes called earnest money or simply earnest, or alternatively a good-faith deposit) is a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious (earnest) about wanting to complete the purchase.
When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations.
An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.
*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.
- Earnest Money is submitted to an escrow company with the accepted purchase contract
- At the close of escrow, the EMD is credited towards the down payment and / or closing costs
- If there are no closing costs or down payment, the EMD is refunded back to the buyer
Who Doesn’t Get Your Earnest Money:
- Selling Real Estate Agent – A conflict of interest
- Sellers – Too risky
- Buying Agent – They shouldn’t have your money in their account
Related Articles – Closing Process / Costs
Timing the market for the best possible opportunity to lock a mortgage rate on a new loan is certainly a challenge, even for the professionals.
While there are several generic interest rate trend indicators online, the difference between what’s advertised and actually attainable can be influenced at any given moment by at least 50 different variables in the market, and with each individual loan approval scenario.
Outside of the borrower’s control, the mortgage rate marketplace is a dynamic, volatile, living and breathing animal.
Lenders set their rates every day based on the market activities of Mortgage Bonds, also known as Mortgage Backed Securities (MBS).
On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.
Factors That Influence Mortgage Backed Securities:
1. Inflation –
According to Wikipedia:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.
As inflation increases, or as the expectation of future inflation increases, rates will push higher.
The contrary is also true; when inflation declines, rates decrease.
Famous economist Milton Friedman said “inflation is always and everywhere a monetary phenomenon.”
Public enemy #1 of all fixed income investments, inflation and the expectation of future inflation is a key indicator of how much investors will pay for mortgage bonds, and therefore how high or low current mortgage rates will be in the open market.
When an investor buys a bond, they receive a fixed percentage of the value of that bond as ‘coupon’ payments.
With MBS, an investor might buy a bond that pays 5%, which means for every $100 invested, they receive $5 in interest per year, usually divided up over 12 payments. For the buyer of a mortgage bond, that $5 coupon payment is worth more in the first year, because it can buy more today than it can in the future, due to inflation. When the markets read signals of increasing inflation, it tells bond investors that their future coupon payments will be less valuable by the time they receive them. So basically, this causes investors to demand higher rates for any new bonds they invest in.
As part of its 2008-2010 stimulus effort, the NY Fed spent almost all of its $1.25 trillion budget buying mortgage bonds. Many believe this strategy kept mortgage rates lower over a 15 month period.
The lending environment significantly changed between 2008, when the Fed began its mortgage bond purchasing program, and early 2010 when the market was left to survive on its own.
When the MBS purchase program was announced in November 2008, mortgage bonds reacted immediately and dramatically.
But at that time, there weren’t any investors willing to take a risk in buying mortgage bonds. The meltdown in the mortgage market and world economies lead many investors to shy away from the risks associated with MBS, which is why the Fed had to step in and basically assume the role as the sole investor of mortgage bonds.
However, loan underwriting guidelines drastically tightened up by 2010, which may create a little more confidence in the mortgage bond market.
3. Unemployment –
Decreasing unemployment will suggest that mortgage rates will rise.
Typically, higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices. For example, the unemployment rate in March 2010 was at 9.7%, just slightly below its highest mark in the current economic cycle.
Every month, the BLS releases the Nonfarm Payrolls (aka The Jobs Report) which tallies the number of jobs created or lost in the preceding month.
The previous report indicated a loss of 36,000 jobs. Not necessarily a number that will move the needle on the unemployment gauge, but some economists suggest we need about 125,000 new jobs each month just to keep pace with population growth. So that negative 36,000 is more like negative 161,000 jobs short of an improving unemployment picture.
One flaw to pay attention to with unemployment rates is that the method of surveying fails to capture part-time workers who desire full-time employment, discouraged job seekers who have taken time off from searching and other would-be workers who are not considered to be part of the labor force.
4. GDP –
GDP, or Gross Domestic Product, is a measure of the economic output of the country.
High levels of GDP growth may signal increasing mortgage rates.
The Federal Reserve slashes short-term rates when GDP slows to encourage people and businesses to borrow money. When GDP gets too hot, there might be too much money floating around, and inflation usually picks up. So high GDP ratings warn the market that interest rates will rise to keep inflation concerns in balance.
Spiking GDP with flat/increasing unemployment begs some questions.
There are two major indicators that help provide more context:
1. Increases to worker productivity – employers are getting more work out of their current employees to avoid hiring new ones
2. Surges in inventory cycles – when the economy first started contracting, manufacturing slowed down to cut costs, and sales were made by liquidating inventory.
This is like a roller coaster cresting a hill, where one part of the train is going up, the other down. Eventually, the other side catches up, inventories are rebuilt by manufacturing more than is being sold. Both surges can throw off periodic reports of GDP.
5. Geopolitics –
Unforeseen events related to global conflict, political events, and natural disasters will tend to lower mortgage rates.
Anything that the markets didn’t see coming causes uncertainty and panic. And when markets panic, money generally moves to stable investments (bonds), which brings rates lower. Mortgage bonds pick up some of that momentum.
Acts of terrorism, tsunamis, earthquakes, and recent sovereign debt crises (Dubai, Greece) are all examples.
Putting It All Together:
Economic data is reported daily, and some items have a greater tendency to be of concern to the market for mortgage rates. If you are involved in a real estate financing transaction, it’s helpful to be aware of these influences, or to rely upon the advice of a mortgage professional who is already dialed in.
Related Mortgage Rate Articles:
When shopping for a new mortgage loan, you may notice an Annual Percentage Rate (APR) advertised next to the note rate. The inclusion of an APR is actually mandated by federal law in order to help give borrowers a standard rule of measurement for comparing the total cost of each loan.
The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate to prevent lenders from “hiding” fees and up-front costs behind low advertised rates.
According to Wikipedia:
The terms annual percentage of rate (APR) and nominal APR describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate.
- The nominal APR is the simple-interest rate (for a year).
- The effective APR is the fee+compound interest rate (calculated across a year)
The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year.
However, the exact legal definition of “effective APR” can vary greatly, depending on the type of fees included, such as participation fees, loan origination fees, monthly service charges, or late fees.
The effective APR has been called the “mathematically-true” interest rate for each year. The computation for the effective APR, as the fee+compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or treated as a short-term loan due in the first payment.
What Fees Are Typically Included In APR?
- Origination Fee
- Discount Points
- Buydown funds from the buyer
- Prepaid Mortgage Interest
- Mortgage Insurance Premiums
- Other lender fees (application, underwriting, tax service, etc.)
Since origination fees, discount points, mortgage insurance premiums, prepaid interest and other items may also be required to obtain a mortgage, they need to be included when calculating the APR. Fees such as title insurance, appraisal and credit are not included in calculating the APR.
The APR can vary between lenders and programs due to the fact that the federal law does not clearly define specifically what goes into the calculation.
What Does APR Not Disclose?
- APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But Adjustable Rate Mortgages always change over the course of 30 years.
- Balloon Payments
- Prepayment Penalties
- Length of Rate Lock
- Comparison between loan terms – EX: A 15-year term will have a higher APR simply because the fees are amortized over a shorter period of time compared to a similar rate / cost scenario on a 30-year term.
APR Comparing Examples:
- Bank (A) is offering a 30 year fixed mortgage at 8.00% APR
- Bank (B) is offering a 30 year fixed mortgage at 7.00% Note Rate
Easy choice, right?
While Bank (B) is advertising the lowest Note Rate, they’re not factoring in the origination points, underwriting / processing fees and prepaid mortgage interest (first month’s mortgage payment), which could essentially make the APR much higher than the one Bank (A) is advertising. So Bank (A) may show a higher rate due to the APR, but they could actually be charging a lot less in total fees than Bank (B).
Before lenders and mortgage brokers were required to state the APR, it was more difficult to find the truth about the total borrowing costs of one loan vs another. When comparing mortgage rates, it’s a good idea to ask your lender which fees are included in their APR quote.
Related Mortgage Rate Articles:
Many people believe that interest rates are simply set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.
The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors. When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.
That market price of those Mortgage Backed Securities (MBS) is what impacts mortgage rates.
Typically, investors are willing to accept a lower return on mortgage backed securities because of their relative safety compared to other investments.
This perception of safety is due to the implied government backing of Fannie Mae and Freddie Mac and the fact that the Mortgage Backed investments are based on real estate collateral. So, if the loan defaults there is real property pledged against potential losses.
In contrast, other investments are considered more risky, specifically stocks which are based on earnings and profit vs real property. The movement between the two investment vehicles often dictates mortgage rates.
Why Do Mortgage Rates Change?
Mortgage rates fluctuate based on the market’s perception of the economy.
Stocks are considered riskier investments, and therefore have an expected higher rate of return to compensate for that risk. When the economy is thriving, it is presumed that companies will perform better, and therefore their stock prices will move higher. When stock prices move higher – MBS prices generally move lower. Mortgage Backed Securities, however, thrive when the economy is perceived as not doing well. When investors forecast a faltering economy, they worry that the return on stocks will be lower, so they frequently engage in a ‘flight to safety’ and buy more secure investments such as Mortgage Backed Securities. Mortgage rates are actually based on the yield of those Mortgage Backed Securities.
Bonds are sold at a particular price based on their value in relation to other available investments. When a bond is sold it yields a certain return based on that original purchase price. As the prices of the MBS increases because investors seek their safety, the yield decreases. Conversely, when investors seek the higher returns of stocks and the MBS are purchased in lesser quantities the price goes down. The lower price results in a higher yield, and this yield is what determines mortgage rates.
How Would I Know if Rates are Expected to Go Up or Down?
When the economy is growing or is expected to grow, stocks will likely become the more favored investment.
When investors buy more stocks, they purchase fewer MBS, which drives the price down.
When the price of the MBS is lower, the yield increases.
Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to increase in this environment.
When the economy appears to be slowing or is doing poorly, investors typically move their money out of the stock market and into the safety of the MBS.
This drives the price of these investments higher, which results in a lower yield.
Since mortgage rates are based on the yield of the 30 Year MBS, you would expect rates to decrease in this environment.
Since these market variables and expectations change multiple times as economic reports are released throughout the course of a week, it is not uncommon to see mortgage rates change several times a day.
Understanding how rates move is not necessarily as important as having a loan officer that is equipped with the technology and professional services to track and stay alerted at the precise moment rates make a move for the better or worse.
Related Mortgage Rate Articles:
Lower mortgage rates is a common misconception that is perpetuated by the mainstream media when the Fed makes an announcement of lowering rates.
However, when the Fed cuts interest rates, mortgage rates can actually increase.
According to Wikipedia:
The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States.
This system was conceived by several of the world’s leading bankers in 1910 and enacted in 1913, with the passing of the Federal Reserve Act. The passing of the Federal Reserve Act was largely a response to prior financial panics and bank runs, the most severe of which being the Panic of 1907.
Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.Events such as the Great Depression were some of the major factors leading to changes in the system.
Its duties today, according to official Federal Reserve documentation, fall into four general areas:
- Conducting the nation’s monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
- Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system, and protect the credit rights of consumers.
- Maintaining stability of the financial system and containing systemic risk that may arise in financial markets.
The Federal Reserve controls two key interest rates in this country:
These are overnight lending rates used by banks when they lend money to each other.
When these rates are low, money is cheaper for banks to borrow, and that “cheap” money spreads throughout the economy.
The aim of the Federal Reserve in its interest rate policy is to either speed up or slow down the economy. In times of economic downturn, the Federal Reserve will cut rates to help create a boost. Conversely, in times of heavy inflation, the Fed will raise rates to help slow down the economy.
That’s it; speed up or slow down….no tricks.
When the credit crisis began to spiral in 2007, the Fed cut rates dramatically in hopes of jump-starting the economy. The Fed keeping rates near zero is an indication that the economy is moving along at a steady pace. If the economy improves to the point where inflation starts to creep up the Fed will begin hiking rates.
The Fed and Mortgage Rates:
Mortgage rates are tied to mortgage bonds, which are traded every day on the secondary market just like stocks.
Bonds are often considered a safer investment than stocks since they yield a constant rate of return.
During times of market turmoil, investors sell their stock holdings and move into bonds (called a “flight to safety” in financial jargon).
Conversely, when the economy is booming, investors move their money away from bonds and into stocks to take advantage of the upswing in the economy.
Remember, The Fed cuts interest rates to boost the economy.
When investors see this boost, they sell their bond holdings and move into stocks.
This movement causes the rates on those bonds to increase naturally as the bonds have to attract new investors with higher rates of return.
As a result, we see mortgage rates increase.
So, the next time you hear the Fed cutting interest rates, don’t assume mortgage rates will simply follow suit. The rate cut is simply meant to boost the economy, which moves money from bonds to stocks, and causes mortgage rates to rise.