Whether you’re buying your first home or your dream home, Leader Bank has a mortgage solution for you. Browse our list of loan programs to get a better idea of all your options. Got a question? Contact us for some personal support.
- Fixed Rate Mortgages
The traditional fixed rate mortgage is the most common type of loan program, where the monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This type of mortgage is structured, or “amortized,” so that it will be completely paid off by the end of the loan term. There are also “bi-weekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks (since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year).
Even though you have a fixed rate mortgage, your monthly payment may vary if you have an “impound account”. In addition to the monthly loan payment, some lenders collect additional money each month for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound account by the lender who uses it to pay the borrower’s property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower’s monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.
- Adjustable Rate Mortgages (ARMs)
Adjustable Rate Mortgages (ARMs) are loans whose interest rate can vary during the loan’s term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans range from 1.75% to 3.50% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds Index (COFI).
When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called “caps.” Suppose you had a “3/1 ARM” with an initial cap of 2%, a lifetime cap of 6%, and an initial interest rate of 6.25%; the highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.
Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.
Components of Adjustable Rate Mortgages
To understand an ARM, you must have a working knowledge of its components. Those components are:
Index: A financial indicator that rises and falls, based primarily on economic fluctuations. It is usually an indicator and is, therefore, the basis of all future interest adjustments on the loan. Mortgage lenders currently use a variety of indexes.
Margin: A lender’s loan cost plus profit. The margin is added to the index to determine the interest rate because the index is the cost of funds and the margin is the lender’s cost of doing business plus profit.
Initial Interest: The rate during the initial period of the loan, which is sometimes lower than the note rate. This initial interest may be a teaser rate, an unusually low rate to entice buyers and allow them to more readily qualify for the loan.
Note Rate: The actual interest rate charged for a particular loan program.
Adjustment Period: The interval at which the interest is scheduled to change during the life of the loan (e.g. annually).
Interest Rate Caps: Limit placed on the up-and-down movement of the interest rate, specified per-period adjustment and lifetime adjustment (e.g. a cap of 2 and 6 means 2% interest increase maximum per adjustment with a 6% interest increase maximum over the life of the loan).
Negative Amortization: Occurs when a payment is insufficient to cover the interest on a loan. The shortfall amount is added back onto the principal balance.
Convertibility: The option to change from an ARM to a fixed rate loan. A conversion fee may be charged.
Carryover: Interest rate increases in excess of the amount allowed by the caps that can be applied at later interest rate adjustments (a component that most newer ARMs are deleting).
Hybrid ARMs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM)
Hybrid ARM mortgages, also called fixed period ARMs, combine features of both fixed rate and adjustable rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7, or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.
The beauty of a fixed period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that’s fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having a period of stability for your payments. A typical one-year ARM, on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on an ARM is considerably lower than on a standard mortgage, they carry the risk of future increases.
Homeowners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to live in their homes for a long time. By getting a lower rate and lower monthly payments than with a 30- or 15-year fixed rate loan, they can breakeven more quickly on refinancing costs, such as title insurance and the appraisal fee. Since the monthly payment will be lower, borrowers can make extra payments and pay off the loan early, saving thousands during the years they have the loan.
Commonly Used Indexes for ARMs
This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 1 year. This index is used on the majority of ARM loans. With the traditional one-year adjustable rate mortgage loan, the interest rate is subject to change once each year. There are additional ARM loan programs available (Hybrid ARMs) for those that would like to take advantage of a low-interest rate but would like a longer introductory period. The 3/1, 5/1, 7/1, and 10/1 ARM loans offer a fixed interest rate for a specified time (3, 5, 7, or 10 years) before they begin yearly adjustments. These programs will typically not have introductory rates as low as the one-year ARM loan, however, their rates are lower than the 30-year fixed mortgage. This index changes on a weekly basis and can be volatile.
L.I.B.O.R. stands for the London Interbank Offered Rate, the interest rates that banks charge each other for overseas deposits of U.S. dollars. These rates are available in 1-, 3-, 6-, and 12-month terms. The index used and the source of the index will vary by lender. Common sources used are the Wall Street Journal and FannieMae. The interest rate on many LIBOR indexed ARM loans is adjusted every 6 months. This index changes on a daily or weekly basis and can be extremely volatile.
The prime rate is the rate that banks charge their most credit-worthy customers for loans. The Prime Rate, as reported by the Federal Reserve, is the prime rate charged by the majority of large banks. When applying for a home equity loan, be sure to ask if the lender will be using its own prime rate or the prime rate published by the Federal Reserve or the Wall Street Journal. This index usually changes in response to changes that the Federal Reserve makes to the Federal Funds and Discount Rates. Depending on economic conditions, this index can be volatile or not move for months at a time.
6-Month CD Rate
This index is the weekly average of secondary market interest rates on 6-month negotiable Certificates of Deposit (CDs). The interest rate on 6-month CD indexed ARM loans is usually adjusted every 6-months. Index changes on a weekly basis and can be volatile.
This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 3 years. This index is used on 3/3 ARM loans. The interest rate is adjusted every 3 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. The index changes on a weekly basis and can be volatile.
This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 5 years. This index is used on 5/5 ARM loans. The interest rate is adjusted every 5 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. This index changes on a weekly basis and can be volatile.
12-Month Moving Average of 1-year T-Bill
Twelve months moving an average of the average monthly yield on U.S. Treasury securities (adjusted to a constant maturity of one year). This index is sometimes used for ARM loans in lieu of the 1-year Treasury Constant Maturity (TCM) rate. Since this index is a 12-month moving average, it is less volatile than the 1-year TCM rate. This index changes on a monthly basis and is not very volatile.
Cost of Funds Index (COFI) – National
This index is the monthly median cost of funds: interest (dividends) paid or accrued on deposits, FHLB (Federal Home Loan Bank) advances and on other borrowed money during a month as a percent of balances of deposits and borrowings at month end. The interest rate on Cost of Funds (COFI) indexed ARM loans is usually adjusted every 6 months. This index changes on a monthly basis and is not very volatile.
Cost of Funds Index (COFI) – 11th District
This index is the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California, and Nevada. Since the largest part of the COFI is interest paid on savings accounts, this index lags market interest rates in both upward and downward trend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good if rates are falling.
National Average Contract Mortgage Rate (NACR)
This index is the national average contract mortgage rate for the purchase of previously occupied homes by combined lenders. This index changes on a monthly basis and is not very volatile.
- Government Sponsored Programs
FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single family and multi-family homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn’t issue loans or set interest rates, it just guarantees against default.
FHA loans allow individuals who may not qualify for a conventional mortgage obtain a loan, especially first-time homebuyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.
Special financing options for Veterans
Designed to offer long-term financing to eligible American veterans or their surviving spouses, Leader Bank’s VA Loan provides borrowers with competitive financing options to purchase or refinance their home with no down payment.
– 100% Financing up to $453,100
– No Private Mortgage Insurance (PMI) option
– No closing cost option
– Flexible FICO requirements with free credit service
– Competitive rates
– Free, no obligation consultations
– An experienced, dedicated Loan Officer who is with you every step of the way!
- Interest-Only Mortgages
A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest-only loans are offered at a fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest-only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest-only period, the larger the new payment will be when the interest-only period ends.
As an example, if you borrow $250,000 at 6 percent, using a 30-year fixed rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest-only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time.
Mortgages with interest-only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.
Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.
- Low-to-Moderate Income Loan Programs
MassHousing makes fixed rate home mortgages available at rates and terms that are either better or not readily available from private lenders. Loans that are insured by Mass Housing feature MI Plus, a unique product that can help a borrower with mortgage payments in the even they lose their job. Existing homeowners can take advantage of MassHousing loan products to purchase a home or refinance into more affordable mortgages.
FNMA’s Home Ready Program is an affordable low down payment mortgage product designed for creditworthy low-to-moderate income homebuyers. The product boost attractive down payment requirements with flexible co-borrower and income source requirements.
FHLMC Home Possible/Home Possible Advantage
Home Possible and Home Possible Advantage loans offer borrowers affordable down payments. With income limits equal to the area medium income or without limits depending on the location of the mortgaged property or if the property is in an “underserved area”, this truly is a great and unique program for all buyers.
FHA loans are mortgage loans insured by the Federal Housing Administration, the largest provider of mortgage insurance in the United States. As part of the U.S. Department of Housing and Urban Development (HUD), FHA insures mortgage loans at affordable prices so that Leader Bank can offer you the best deal possible.
- What type of loan program is best for me?
The many different types of home loans available can seem overwhelming. Should you choose a fixed rate, adjustable rate, or government loan mortgage? The truth is there is no right answer. Choosing a loan type is an important decision that is best made after you have researched your options. Remember, taking the time to explore your options now can mean saving thousands of dollars in the long run.
Ask yourself the following questions to determine what loan type is right for you:
- Do you expect your financial situation to change over the next few years?
- Do you plan to live in your current home for a long time?
- Do you feel comfortable with the idea of a changing mortgage amount?
- Do you want to be free of mortgage debt by the time your children go to college or you retire?
A professional lender is the best resource available to help you decide which loan best fits your needs. Follow the general guidelines outlined below to get started selecting the best mortgage for your home.
How many years do you plan to stay in your home? Plan(s) to Consider 1-3 3/1 ARM or 1-year ARM 3-5 5/1 ARM 5-7 7/1 ARM 7-10 10/1 ARM or 30-year fixed 10+ 30-year fixed or 15-year fixed
- Home Equity Line of Credit
A home equity line of credit lets homeowners borrow money against the equity in their home. They are often used for home improvements or to consolidate high-interest rate debt. Borrowers who require standalone and second mortgage financing may obtain a fixed Annual Percentage Rate for the initial term of the loan, followed by a rate based on the current Prime index for the life of the loan. By combining a traditional first mortgage with this second mortgage program, borrowers may potentially avoid higher cost non-conforming financing options as well as private mortgage insurance, all while giving them access to funds for their current needs.