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With most loan programs the borrower is allowed to buy-down their interest rate. The more points you pay the lower the interest rate.
The annual percentage rate is what you should use to compare the cost of mortgage loans. This rate takes into account the interest rate on the loan, the points you must pay, and the other loan fees you may have to pay. This rate is an effective means to compare loans.
With most loans, you have the opportunity to lock-in your interest rate. When you lock-in your interest rate, you are guaranteeing that you will have everything completed to close the loan within a 30 to 60 day period and in exchange for this guarantee the lender will guarantee your interest rate will not change during this 30 to 60 day period.
In addition to points, the borrower has several other expenses that must be paid at the closing of the loan. The items that may be required depends upon the loan program you are applying through. Some of the items that may be required , but not all, are as follows:
- an appraisal fee from a licensed appraiser
- a site survey
- mortgage / title insurance
- credit report
- and a loan processing fee
With an adjustable rate mortgage the borrower should become very familiar with how their interest rates adjust and when they adjust. The interest rate on an adjustable rate mortgage is made up of two parts, the index and the margin. With most adjustable rate mortgages the index is either the one, three, or five year U.S. Treasury Note. This index is independent of the bank and generally goes up or down with the general market conditions. If the index rate goes up, the rate on your mortgage will go up.
The margin is a specified percentage to be added to the index to arrive at the adjustable rate mortgage rate. The First Bank adjustable rate mortgage is generally the one year Treasury Note rate plus 2.75%.
Most lenders offer a one year discount rate or teaser rate to entice the borrower to borrow money with an adjustable rate mortgage. They offer the discount rate as an incentive to get the borrower to share some of the risk associated with interest rate fluctuations. This discounted rate creates a small payment for the first year but many borrowers feel sticker shock at the end of one year when their payment is increased to reflect the higher interest rate. If you are borrowing money on an adjustable rate mortgage, you should ask for both the teaser rate payment and what the payment would be without the discounted rate.
In order for the borrower not to be accepting all of the risk of interest rate fluctuations, most lenders place "caps" or limits on the amount the interest rate may change. At First Bank, interest rates on an adjustable rate mortgage may increase no more than 2% in any one year and no more than 6% over the life of the loan.
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