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  Loan Descriptions
Below, you will see a brief description of the many types of mortgage loans. Some of them are not used as much as others.

If you have any questions, just click "Contact Us" on the left. You can contact Bay Financial Company by calling 650-685-5815 or sending a fax to 650-685-5821. You can email us at info@bayfin.com.

Conforming Loan
A loan in which the amount borrowed is less than or equal to $417,000 (this number could be different depending on the bank)

Jumbo Loan
A loan in which the amount borrowed is greater than $417,000 (this number could be different depending on the bank)

30 Year Fixed Rate Loan
This type of loan has 360 monthly payments that remain the same for the entire 30 year period after which time the loan is paid in full. The monthly payment is based on an interest rate which does not change over the term of the loan (hence the term "fixed rate").

20 Year Fixed Rate Loan
This type of loan is the same as the 30 year fixed rate loan except the life of the loan is 240 months as opposed to 360 months. Since the loan is being paid slightly faster than the 30 year fixed rate loan, monthly payments for this type loan are higher than the 30 year fixed rate loan. Some Lenders allow for a lessor rate.

15 Year Fixed Rate Loan
This type of loan is the same as the 30 year fixed rate loan except the life of the loan is 180 months as opposed to 360 months. Since the loan is being paid faster than either the 30 year fixed rate loan or the 20 year fixed rate loan, monthly payments for this type loan are higher than the other two loans.
Generally, the longer a lender agrees to keep the interest rate "fixed", the greater the risk to the lender, therefore, in most instances, interest rates on 15 year fixed rate loans are slightly lower than on 20 or 30 year fixed rate loans.

Interest Only Loan
A mortgage is "interest only" if the monthly mortgage payment does not include any repayment of principal for some period. The payment consists of interest only. During that period, the loan balance remains unchanged.For example, if a 30-year fixed-rate loan of $100,000 at 8.5% is interest only, the payment is .085/12 times $100,000, or $708.34. Otherwise, the payment would be $768.92. This is the "fully amortizing payment" - the payment that, if maintained over the term of the loan, will pay it off completely. The interest only loan thus reduces the monthly payment by 7.9%. A loan that is interest-only for the full term would not amortize. The loan balance would be the same at term as it was at the outset. Back in the twenties, loans of this type were the norm. Borrowers typically refinanced at term, which worked fine so long as the house didn't lose value and the borrower didn't lose his job. But the depression of the thirties caused a large proportion of these loans to go into foreclosure. Lenders stopped writing them and have never brought them back. They want loans that eventually amortize. Hence, the interest only loans of today are interest only for a specified period, such as 5 years. At the end of that period, the payment is raised to the fully amortizing level. In such case, the new payment will be larger than it would have been if it had been fully amortizing at the outset. Suppose, for example, the interest only period on the loan described above is 5 years. Then the payment starting in month 61 would be $805.23. To reduce the payment by $60.58 for the first 5 years, the borrower would pay an additional $36.31 for the next 25. The longer the interest only period, the larger the new payment will be when the interest only period ends. If the same loan is interest only for 10 years, for example, the fully amortizing payment beginning in month 121 is $867.83. To reduce the payment by $60.58 for the first 10 years, the borrower would pay an additional $98.91 for the next 20. Interest only mortgages are for borrowers who want a lower initial payment, and have some confidence that they will be able to deal with a payment increase in the future.

Interest Only 10/1 ARM
This is an adjustable rate interest only mortgage with the interest rate constant for 10 years and then adjusted every year thereafter. The first 120 payments will be based on the interest rate and loan balance. Payments will be calculated to pay only the accruing monthly interest at the Initial Interest Rate. Starting with the 121th payment, the monthly loan payment will consist of principal and interest and will fully amortize over the remaining 20 years. Available for both conforming and non-conforming loan amounts with an index of the average of InterBank offered rates for one-year U.S. dollar-denominated deposits in the London market ("LIBOR"), as published in The Wall Street Journal. The interest rate cannot increase or decrease by more than 5% on the first interest rate adjustment date. Commencing with the second interest rate adjustment date, the interest rate cannot increase or decrease by more than 2% from the interest rate in effect immediately prior to the interest rate adjustment date. There is a life of loan interest rate ceiling equal to the sum of the initial interest rate plus 5%. The floor is the margin.

Interest Only 30-Year Fixed

A fixed-rate interest only mortgage with the interest rate constant for 360 months. The first 180 payments will be based on the interest rate and loan balance. Payments will be calculated to pay only the accruing monthly interest. Starting with the 181st payment, the monthly loan payment will consist of principal and interest and will fully amortize over the remaining 15 years.

5 Year Balloon Loan
This type of loan has fixed monthly payments for the term of the loan (five years) that are based on a 30 year repayment schedule. At the end of the five year term, the outstanding principal balance of the loan is due plus any unpaid interest.
This loan program generally has a refinance option at the end of the five year period that gives the borrower the option to extend the loan at a fixed rate for the remaining 25 years. The new interest rate is based upon fluctuations in an index (typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index (typically .625% - 1.25%). For example, if the index equals 7.0% at the time of the extension of the loan and the margin is 1.00%, the new interest rate would be 8.00%. In order to exercise this option, there are usually several conditions that must be met such as: (1) the borrower must still be the owner/occupant of the property, and (2) the borrower must be current in making monthly payments and can not have been more than 30 days late on any of the last 12 monthly payments made prior to the time the option is exercised. In addition, the option may not be available if interest rates have risen by more than 5.00% over the initial rate.

7 Year Balloon Loan
This type of loan is similar to the 5 Year Balloon loan except for the fact that the term of the loan is 7 years as opposed to 5 years and the refinance option at the end of the term is for an additional 23 years as opposed to 25 years. As with the 5 Year Balloon loan, the index is typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index (typically .625% - 1.25%). Also, as with the 5 Year Balloon, loan, the borrower must meet specified conditions to be able to take advantage of the loan extension option and the interest rate must not have risen by more than 5.00% over the initial rate.

3-2-1- Buy down Loan
This type of loan program is based on an interest rate (actual rate) that does not change over the term of the loan and has fixed monthly payments that are based on a 30 year repayment schedule. However, the monthly payments that are made during the first 36 months (three years) are calculated based on an interest rate that is less than the actual rate. The first 12 monthly payments of the loan are calculated based on an interest rate that is 3% less than the actual rate. For the second year of the loan, payments 13 through 24 are based on an interest rate that is 2% less than the actual rate of the loan. For the third year of the loan, payments 25 through 36 are based on an interest rate that is 1% less than the actual rate. After the third year, the monthly payments to be made over the remaining 27 years of the loan are based on the actual rate.
This type of loan is typically used to help borrowers who are unable to qualify for a loan at current interest rates. By "buying down" the interest rate, the borrower decreases the initial monthly payments that are required to be made which increases the borrower's ability to qualify for the loan. The cost of "buying down" an interest rate for a period of time is generally determined by calculating the difference between (a) the total monthly payments that would have been made during the buy down period if the loan did not have a buy down feature and (b) the total monthly payments to be made during this same period with the buy down feature in place. This amount is generally paid for at time of closing by the Lender or the Seller, depending on how it is structured.

2-1 Buy down Loan
This type of loan is similar to a 3-2-1 Buy down loan, however, the buy down feature of the loan occurs during the first two years of the loan as opposed to the first three years. Accordingly, the first 12 monthly payments of the loan are calculated based on an interest rate that is 2% less than the actual rate and for the second year of the loan, payments 13 through 24 are calculated based on an interest rate that is 1% less than the actual interest rate.

B/C Credit Loan
These types of loans are available to borrowers who have or have had credit problems such as being late on or defaulting on the repayment of loans or credit cards. Although such loans are available as fixed rate or adjustable rate mortgage loans, the interest rate and/or costs associated with such loans are generally higher than loans available to borrowers who do not have a history of credit issues to reflect the fact that the risk associated with such loans is generally higher. Borrowers who do not have a history of credit issues are said to have "A" credit. Those with a history of credit issues are said to have "B", "C" or "D" credit depending on the severity of the credit issues.

No Income/No Asset Verification Loan
This type of loan is a No Income Verification Loan and a No Asset Verification Loan. It is used by borrowers who do not wish to or are unable to verify their income and their assets. Once again, the interest rate and/or costs for such loans may be slightly higher than normal to reflect the higher degree of risk involved in loaning to borrowers without verifying their income or assets. Such risk is offset by borrowers who have an excellent credit history.

Government Loan
This type of loan is guaranteed by a federal agency such as the Veterans Administration or the Federal Housing Administration or by a State agency such as a State housing authority. Such loans, however, contain income, purchase price or other eligibility requirements.

Construction Loan
This type of loan is used to finance the construction of a home. It may or may not also include the purchase of the land upon which the home is to be built. Unlike a mortgage loan where the entire amount of the loan is disbursed to the borrower at the time the loan transaction is consummated, a construction loan involves a series of disbursements which are linked to a construction schedule. Some construction loans have fixed interest rates, others have variable interest rates. In addition, some construction loans automatically convert to a regular mortgage (referred to as "permanent" financing) once construction has been completed, while others require another loan transaction to take place so the borrower can payoff the construction loan and obtain permanent financing.

Bridge Loan
This type of loan is offered by lenders to borrowers who plan to use money from the sale of their current property to purchase their new property but are moving into the new property before the sale of their current property takes place. In such instances, a bridge loan is obtained, (based on and secured by the borrower's equity in their current property), to "bridge" the time between when the borrower buys their new property and the time when the borrower sells their current property At the time of the sale of the current property, the proceeds from such sale are used to pay off the bridge loan. Typically, bridge loans are for a short period of time (e.g. 3 - 6 months) and feature adjustable interest rates tied to an index such as the prime interest rate.

Land Loan
While the typical mortgage loan involves both a structure and the land upon which the structure is built, this type of loan involves only land on which a structure has yet to be built. In doing a Land Loan, if converted to a Construction-Permanent Loan within 1 year, this will sometimes allow for a credit back to the customer for his/her new loan.

6 Month Adjustable Rate Mortgage (ARM)
This type of loan has monthly payments that are based on a 30 year repayment schedule but the interest rate (and, therefore, the monthly payments) may change every 6 months (this is referred to as the "adjustment period"). The new rate is based upon fluctuations in an index (typically the One Year Treasury Security) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the "margin" (typically 2.50% - 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 1% and is referred to as an "adjustment cap". There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a "lifetime cap". The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.

1 Year Adjustable Rate Mortgage (ARM)
This type of loan is similar to the 6 month ARM except for the fact that the adjustment period is every 12 months (one year) as opposed to every 6 months. In addition, the adjustment cap on a 1 year ARM is typically 2% as opposed to 1%. The lifetime cap is typically 6%. The index is typically the One Year Treasury Security index and the margin is typically 2.50% - 3.00%.

3/1 Adjustable Rate Mortgage (ARM)
This type of loan has monthly payments that are based on a 30 year repayment schedule and the interest rate remains fixed for the first 36 months (three years). After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). This is referred to as the "adjustment period". The new rate is based upon fluctuations in an index (typically the One Year Treasury Security) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the "margin" (typically 2.50% - 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 2% and is referred to as an "adjustment cap". There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a "lifetime cap". The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.

5/1 Adjustable Rate Mortgage (ARM )
This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 60 months (five years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

7/1 Adjustable Rate Mortgage (ARM)
This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 84 months (seven years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM and a 5/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

If you have any questions, just click "Contact Us" on the left. You can contact Bay Financial Companyby calling 650-685-5815 or sending a fax to 650-685-5821. You can email us at info@bayfin.com.





 

Bay Financial Company 220 Baldwin Ave, San Mateo, CA 94401
Tel. 650-685-5815, fax. 650-685-5821
info@bayfin.com