Loan Products

We believe it is important for our clients to know and understand loan program terminology. Comprehension is vital when interpreting the right loan for you. To see a definition, click on the loan product and a hyperlink will take you to the definition of interest.

Fixed Rate Loans
Fixed Rate Mortgage (FRM) | 15 Years versus 30 Years  | Balloon Payment Mortgage

Adjustable Rate Loans
Adjustable Rate Mortgage (ARM) | Intermediate Fixed Rate Mortgages, or Short-Term Fixed Rates | Option ARM | Index | Margin | Fully Indexed Rate or Effective Rate | Payment Cap | Life-time Cap |
Start Rate |  Recast Point | Neg Am
Indices
LIBOR | 11th District COFI | COSI | MTA | Prime Rate | CODI

Second Mortgages
HELOC |  Home Equity Loan

Specialty Loans
Interest Only | 2-1 Buydown

Fixed Rate Mortgages (FRM)
This is a mortgage in which the interest rate does not change during the entire term of the loan. This is a mortgage in which the interest rate does not change during the entire term of the loan. The most common FRMs are 15 & 30 years and now there are 40 & 50 years available.

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15 years versus 30 years
15-year fixed rate mortgages carry a lower interest rate than a 30-year fixed rate mortgage, and therefore reduce the overall cost of the money that you're borrowing. However, there is one thing to understand, a 15-year fixed rate mortgage is amortized over half the period of time and therefore subsequently results in a significantly higher monthly payment.

It's important to assess, at the time of refinancing or purchasing, whether that payment will ever be a problem for you. You need to look at the issues involving your prospective income in the future, whether it will be dropping or not and whether or not you're want to obligate yourself to this payment, because that's exactly what this loan represents; it is an obligation to a higher monthly payment.

Remember, you can always take a 30-year loan and make it a 15-year loan by understanding how to prepay the principle correctly. On a 15-year fixed rate mortgage you're obligated to that payment. You can never take 15-year loan and make it a 30-year loan.

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Balloon Payment Mortgage
This is where the remaining balance must be paid in full at the end of a pre-set term. Majority of these types of loans are at specified fixed rate period, but the loan is not completely amortized resulting in a remainder payment in full at the end of the fixed period. For example, 40/30 Fixed Rate loan means the amortization schedule is set for 40 years, but at 30 years, the remaining balance is due in full at the end of 30 years.

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Adjustable Rate Mortgage
Adjustable Rate Mortgage (ARM) have 3 main features, the first is called Margin, the second is called Index and the third is called Caps.  A Margin is the fixed or constant portion of your adjustable that never changes. It stays the same for the duration of your loan. The Index is your variance. This is the portion of your Adjustable that makes it an Adjustable. Now, if you take this fixed Margin and add it to the varying Index, you derive your interest rate. Accordingly, Margin + Index = Interest Rate or Fully Indexed Rate. Due to the adjustment by the index, your payment will fluctuate based the index movement.

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Intermediate Fixed Rate Mortgages or Short-Term Fixed Rates
These ARMs have a short term fixed rate. Typical fix rate periods are 2 years, 5 years and 10 years. After the fixed rate period has expired, the payment will be readjusted based on the current fully indexed rate or margin + index.

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Option ARM
Option ARM are often called different things like Pick-A-Payment Program or Negative Amortization Adjustable Rate Mortgage. An Option ARM is typically a four payment option to allow the consumer to pay the payment that best fits their financial situation on each billing period. The first payment option is a neg am payment, the second option is an interest only payment then 15 years and 30 years payment options.

The greatest benefit of the Option ARM is its flexibility and cash flow. The benefits are to give the borrowers the choice of either deferring interest to achieve financial goals faster or to help real-estate investors increase their cash flow.

The right candidate for an Option ARM:
1. Homeowners who leverage the reduced monthly payments so they can invest the monthly savings in an asset accumulation account with safe and profitable returns.
2. Homeowners who have short-term need to keep their payments lower. Examples would be real estate investors and people in transition who either plan to move within 2-4 years, or who need a bridge loan until they sell another property, and will refinance once they get the cash from the other property.

Who are NOT the best candidates for Option ARMs
1. Homeowners who plan to be in their home for the long-term and select an Option ARM for the low monthly payment, but don't invest the difference. They are in high risk of foreclosure when the recast point has been effective.

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Index
An indicator that is typically measured by an average of an economic variable over a certain period of time.

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Margin
The amount added to the index on an ARM to determine the interest rate at each adjustment. Generally, the index remains fixed over the life of the loan.

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Fully Indexed Rate (FIR) or Effective Rate
The interest rate is the sum of the current index rate on an ARM plus the margin.
index + margin = FIR

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Payment Cap
The limitation on increases or decreases in the payment amount of an adjustable-rate mortgage. The payment cap is usually 7.5% annually.

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Life-time Cap
The amount that the interest  rate is allowed to increase during the term of the mortgage.

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Start Rate (a.ka. teaser rate)
The initial interest rate charged on the loan. This rate typically lasts from one to three months.

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Recast Point
The date when a homeowner with an Option ARM has their minimum monthly payment significantly increased higher because their principle balance increases to more than 110% of the original amount borrowed. Many times a recast can cause the client's payment to increase by as much as 80% to 120%.

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Neg Am or Negative Amortization
The opposite of "Amortization," which means that monthly payments are large enough to pay the interest and reduce the principal on the mortgage. Negative amortization occurs when the monthly payments does not cover the interest cost or less than interest. When negative amortization occurs, the interest cost that is not covered is added to the unpaid principal balance. This means that even after making many payments, the borrower could end up owing more than he or she did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that  are not high enough to cover the interest that is due.

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LIBOR (London Inter Bank Offered Rate)
LIBOR is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market).

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11th District Cost of Funds Index (COFI)
A Cost of Funds Index or COFI is a regional average of interest expenses incurred by financial institutions, which in turn is used as a base for calculating variable rate loans. The interest rate on an adjustable rate mortgage, for example, is often linked to a regional COFI specified in the particular loan documents. COFIs, in turn, are usually calculated by a self-regulatory agency like Federal Home Loan Banks. In California, for example, many home mortgage loans are indexed to the Federal Home Loan Bank of San Francisco. Interest rates on COFI loans and mortgages tend to fluctuate more slowly than variable-rate loans linked to other indexes.

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COSI (Cost of Savings Index)
This index is the weighted average of the rates of interest on the deposit accounts of the federally insured depository institution subsidiaries of Golden West Financial Corporation (GDW). All of the depository institution subsidiaries of Golden West Financial Corporation operate under the name World Savings.

World Savings receives money from consumers in the form of deposits and lends money as home or other loans. The interest rates in effect on these deposits are the basis for the COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month.

The COSI adjusts monthly and has a one-month reporting lag. It is computed on the last day of each calendar month and is announced on or near the last business day prior to the fifteenth day of the following calendar month.

The Cost of Savings index considered to be among the most stable ARM indexes in the industry. It is one of the most widely used Option ARM loan indexes.

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MTA (Moving Treasury Average)
The Monthly Treasury Average, also known as 12-Month Moving Average Treasury index (MAT) is a relatively new ARM index. This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated* by averaging the previous 12 monthly values of the 1-Year CMT.

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Prime Rate
The prime rate is defined by The Wall Street Journal as "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks." The prime rate does not change at regular intervals.

It is 3 points above the Federal Funds Rate. Prime Rate Index is typically tied with HELOCs or Home Equity Loans.

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CODI (Cost of Deposits Index)
These indexes are averages of the secondary market interest rates on nationally traded Certificates of Deposit. The Certificates of Deposit, also known as CDs, are usually issued by banks and other financial institutions. They pay a fixed rate of interest for a specific period of time.

The Certificates of Deposit of various maturities, including 1-Month, 3-Month, 6-Month and 1-Year, are used as ARM indexes. The 6-Month Certificate of Deposit (6-Mo CD) is the most popular of the CD indexes.

The CD indexes are very volatile and generally considered to react quickly to change in the market, which is good for you if rates are falling but not good for you if rates are rising.

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HELOC (Home Equity Line of Credit)
An equity line of credit is a 2nd Trust Deed because the line of credit itself is attached to your property. An equity line of credit has interest-only draw period. After the initial draw period, the consumer will start to repay whatever balance is left for the remainder of the term. In other words, it becomes a fully-amortized note at the conclusion of the initial interest-only period.

There are some facets to an equity line of credit. It allows the consumer to control your payment and cash flow on a monthly basis and because the consumer has an interest-only loan, the consumer can make a minimum payment. Beyond that, you can pay extra money towards the principal.

The consumer's payment is based upon the existing balance that was presently owe. Like a credit card, when the payment coupon arrives the next month, the payment will immediately decrease because that payment is based on the balance owed and not on the original indebtedness as in a fully-amortized fixed rate note. Where it differs from a credit card, is the fact that it's tax deductible.

How it works is that the consumer gets a checkbook in the mail when they receive their first payment coupon. They can write a check against that line of credit, and continue to make payments based on what was drawn out of the line of credit.

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Home Equity Loan
Similar to a HELOC where money is drawn out on a second trust deed, a home equity loan draws the entire amount in one lump sum, and typically the interest rate is fixed.

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Interest Only
An interest-only loan is a loan in which for a set term the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the interest-only term the borrower may enter an interest-only mortgage, pay the principal, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option.

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2-1 Buydown
The consumer buys down the interest rate by 2% in year 1, and 1% in year 2 of a 30-year loan. By charging the borrower 1–1.5 points, which are incorporated into the loan amount.

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