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Financing101
- 1. Financing 101 Financing 101 Interest Rates and Types of Programs © 2013 NVR Inc. All Rights Reserved. All trademarks are the property of their respective owners. Proprietary Information—Restricted. For Internal Use Only. Financing 101
- 2. Financing 101 Objectives • Review PITI • Review Interest Rates and Payments • Understand types of programs and terminology • Relate features and benefits
- 3. Financing 101 Interest Rates and Payments
- 4. Financing 101 • Monthly mortgage payment is made up of three parts, called PITI – Principle: Amount that goes towards the actual loan amount – Interest: Amount that goes toward the Interest – Taxes & Insurance: Amount that goes into an escrow account that pays for other things Mortgage Payments
- 5. Financing 101 Taxes and Insurance • Held in an escrow accounts used to pay: – – – – Property taxes Homeowners insurance Hazard insurance Mortgage Insurance • Amount may change yearly
- 6. Financing 101 Interest Rates • When a customer buys a home, his/her interest rate is typically floating. – The rate can move up or down until the customer has locked-in an interest rate. • A customer can typically lock in to a rate between 30 and 60 days of settlement. – Locks beyond 60 days may be available
- 7. Financing 101 Understanding Interest Rates • Short Term Rates: Short term banking rates are used for auto loans, personal loans and credit cards. These rates are controlled by the Federal Reserve. • Long Term Rates: Long Term Interest rates are used for mortgages. Mortgage rates are affected by bond prices on Wall Street.
- 8. Financing 101 How are Mortgage Rates Determined? • Secondary Marketing determines rates daily based on the bond market activity each morning • Many economic factors effect bond pricing: – Housing Starts – Consumer Confidence – Unemployment
- 9. Financing 101 Extended Locks • Rate Locks – A customer will typically lock their rate 30-60 prior to closing • Some programs have extended lock options – Customer may be able to have rate protection for up to 220 days • Lock availability depends on the specific Loan program • May require an upfront fee • May be credited back at closing – Float Down: may be offered as an option where the customer can relock at a lower rate prior to closing. • Usually only available ONE time • Availability depends on program
- 10. Financing 101 Financing Programs Unlocking the mystery of Financing options! Financing 101
- 11. Financing 101 Financing Programs 30 yr. Fixed 5/1 ARM 20 yr. Fixed 7/1 ARM 15 yr. Fixed 3/1 ARM 10/1 ARM 2-1 Buydown
- 12. Financing 101 Fixed Rate Programs How does a Fixed Rate Mortgage work? Financing 101
- 13. Financing 101 Fixed Rate Loans: • Definition: A fixed rate mortgage is one that has a rate of interest that does not change. • Principal and interest payments will always be the same. • Most conservative, most secure and most stable type of mortgage. • Amortization: The loan amount is reduced regularly by scheduled monthly payments over the course of the loan (usually 15 or 30 year)
- 14. Financing 101 Fixed Rate Loans • 30 Year Fixed Rate: Fixed Rate loan amortized over 30 years. The most popular program in mortgage • Features & Benefits: – Provides customer with peace of mind and stability of knowing the interest rate will never change. – As customer’s income increases, their payment will remain the same. This will allow them to become increasingly comfortable with their monthly investment. – They can take advantage of currently attractive interest rates and not have the expense and hassle of refinancing in the future.
- 15. Financing 101 30 Year Fixed Rate 30 Year Fixed 8 Interest Rate 7 6 5 Year 1 5.5% Year 30 5.5% 4 3 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10-30
- 16. Financing 101 • INSERT 30 Year Fixed QUIZ 30 Year Fixed
- 17. Financing 101 Buydowns What is a Buydown? How they might benefit a customer? Financing 101
- 18. Financing 101 Buydowns • Definition: – Fixed Rate loan where additional funds (a subsidy) are paid at settlement – Allows the borrower to pay a reduced payment at the beginning of the mortgage. • Most common type: 2/1 Buydown – Interest rate is lowered 2% below the fixed rate for the 1st year and 1% below the fixed rate for the 2nd year – Interest rate will then be fixed for years 3-30. • Cost – Actual cost is calculated on a payment – to – payment basis – The average cost is 2.5% – This “subsidy” can be paid by the seller, buyer and in some cases, the lender.
- 19. Financing 101 Buydown Chart 8 Interest Rates 7 Year 3 6% Year 30 6% 6 5 Year 2 5% 4 Year 1 4% 3 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10-30
- 20. Financing 101 Buydowns • Features and Benefits: – Offers the stability of the 30 year Fixed rate – Allows customer to ease into new Mortgage Payment – Ideal for a customers who are: • Anticipating future pay increases (i.e., medical students, recent grads, etc.) • Expenses ending in the next year or two (i.e., car payment, childcare, child support, tuition, etc.) – Excellent for short term buyers (less than 5 years) • This will give the customer the benefit of a lower average interest rate for the period of time they plan to live in the home
- 21. Financing 101 • INSERT Buydown QUIZ Buydown
- 23. Financing 101 Adjustable Rate Mortgage Definition: Adjustable Rate Mortgage (ARM) A loan in which the interest rate adjusts at established intervals over the life of the loan. The rate can increase or decrease depending on the market conditions at the time of the adjustment. ARM loans are tied to: 1. An established index, usually a published rate (i.e. Treasury Securities, LIBOR, etc.) 2. A margin - a fixed number that is set by the investor
- 24. Financing 101 Adjustable Rate Mortgages • Caps are set by the investor and limit the change when the rate adjusts. – Two caps (i.e. caps of 2/6): First cap – maximum rate change per adjustment Second cap - maximum rate change over the life of the loan – Three caps (i.e. caps of 5/2/5): First cap – maximum rate change for first adjustment Second cap - maximum rate change per adjustment Third cap - maximum rate change over the life of the loan
- 25. Financing 101 Frequently Used Indexes • All adjustable rate mortgages (3/1, 5/1, etc.) use an index to calculate future interest rates and payments – Fully Indexed Rate: combination of the margin and the current index • Two of the most common are: – LIBOR – London Inter Bank Offered Rate. – US Treasury Securities
- 26. Financing 101 Type of ARM ARMs 3/1 Fixed rate for how many years? 3 5/1 5 7/1 7 10/1 10 After fixed period, adjusts how often? Once a year for the rest of the life of the loan.
- 27. Financing 101 How does the Interest Rate on an ARM adjust? 1. Add the index and margin together to determine the fully indexed rate. 2. Compare that rate with the current rate. 3. Review the caps for any limitations in the change. Example: New Rate: 3/1 ARM, Caps of 2/5 Fully Indexed Rate = Margin + Index Fully Indexed Rate = 2% + 5% Fully Indexed Rate = 7% Starting Rate 4% Margin 2% Current Index is 5% What is the new rate? Caps = Cannot increase more than 2% per year, so new rate is 6%
- 28. Financing 101 Features of ARMs • Initial rate on an ARM is typically lower than a fixed rate mortgage • Ideal for short-term buyers (plan to be in their homes for only 3 – 10 years) – Reduced interest rate for the period of time they plan to live in the home • May save them a substantial amount of money in the long run. – The loan is re-amortized when the interest rate is adjusted. – May free up monthly income to use toward other investments Drawbacks: • Rates could rise at the time of adjustment • Stigma from Interest Only ARMs in the past
- 29. Financing 101 ARM Chart 8 Year 9 8% Year 10-30 8% Interest Rates 7 Year 8 7% 6 Year 7 6% 5 Year 6 5% 4 Year 1 4% Year 2 4% Year 3 4% Year 4 4% Year 5 4% 3 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year Year 10-30 9
- 30. Financing 101 • INSERT ARMs QUIZ ARMs
- 31. Financing 101 Benefits of All Three Benefits Program Features Fixed Rate 3 2-1 Buydown 5 Adjustable Rate Mortgage (ARM) 7 Once a year for the rest of the life of the loan.
- 32. Financing 101 Program Rate Comparison 8 7 6 30 Year Fixed (at 5.5%) 5 2-1 Buydown (at 6%) 4 5/1 Arm (at 4%, 1/4 Cap)* 3
- 33. Financing 101 Products The differences between FHA, VA and Conventional Financing 101
- 34. Financing 101 Conventional Financing • Refers to any mortgage that is not insured or guaranteed by a government agency • Depending on the Loan To Value (LTV), the conventional loan may require Private Mortgage Insurance (PMI)
- 35. Financing 101 Conventional Financing • Conforming – A loan that conforms to normal investor guidelines. – Usually required to be under $417,000 • Non Conforming (Jumbo) – Outside the normal investor guidelines – Usually over $417,000 – Prompts a higher interest rate than Conforming
- 36. Financing 101 Conventional Benefits and Drawbacks • Benefits: – More programs usually available – No prepayment penalty – Financing for primary, secondary and investment residency – PMI only required when LTV is over 80% – Ratios: Front End 28% Back End 36% • Drawbacks: – Most rigid ratio and credit score requirements – Highest down payment usually required
- 37. Financing 101 FHA Financing • Government loan where the Federal Housing Administration (FHA) provides insurance protection to private mortgage lenders • FHA mortgages are subject to both an upfront Mortgage Insurance Premium (MIP) and an annual (paid monthly) premium
- 38. Financing 101 FHA Benefits and Drawbacks • Benefits: – – – – – – Minimal down payment requirement (3.5%) More flexible credit and income standards Fully assumable with lender approval 6% seller contributions allowed Non-occupant co-borrowers allowed Most lenient ratios: Front End 31% Back End 43% • Drawbacks: – Can only be used on Primary residences – Mortgage Insurance Required (life of the loan) – Upfront Premium
- 39. Financing 101 VA Financing • Congress created VA Loans to help veterans buy homes with a minimal amount of cash required • VA Entitlement: portion of the approved mortgage amount the VA will guaranty the lender against default of the borrower – Entitlement amount is listed on the back of the Certificate of Eligibility issued by the VA to the veteran • Funding Fee: VA charges a fee from 1.25%-3.30% of the mortgage amount based on LTV and prior usage of VA Entitlement – Paid at settlement by either the veteran borrower or the seller – Can be rolled into the mortgage amount
- 40. Financing 101 VA Benefits and Drawbacks • Benefits: – – – – Little or no down payment required Flexible qualifying ratios Seller can pay up to 4% Back End Ratio: 41% • Drawbacks: – – – – Funding Fee May only be available to a certain amount Can only have one VA loan at a time Co-borrower can only be veteran’s spouse or another veteran
- 41. Financing 101 INSERT QUIZ QUESTIONS • INSERT QUIZ QUESTIONS
Notas do Editor
- Welcome to Financing 101. The objective of this course is to explain some primary concepts of mortgage banking and specifically our business at NVR Mortgage. By the end of this course you should have some basic fundamentals to help you become a successful employee. As is the case with anything, you will want to practice and review these throughout your employment.
- This example shows how a 30 year fixed rate behaves. The numbers on the vertical axis show the interest rate.Animation Order:Click 1: Year 1 appearsClick 2: Year 10-30 appears, showing that the rate stays the sameClick 3: The line appears showing the relationshipYou can see from this chart that the rate doesn’t change throughout the entire life of the loan.
- True or False:We offer a fixed loan term of 15, 20 or 30 years? TrueDuring the fixed loan term the interest rate will change only once? False – never changesThis program is the most risk adverse? True
- Now that we have discussed Fixed rate loans, we are going to shift gears and discuss loan buydowns.
- Animation Order:Click 1: Year 1 appearsClick 2: Year 2 appearsClick 3: Year 3 appearsClick 4: Year 30 appears, showing that the rate stays the sameClick 5: The line appears showing the relationshipYou can see how the rate of the buydown appears on this chart. You can see that the rate increases 1% in each year for the first 2 years. In Year 3, it then stays the same for the life of the loan.
- Read notes. Caps will determine the floor (lowest) and the ceiling (highest) rate.
- Typically the higher the ARM, the higher the cost. 5/1 ARM is by far the most common ARM product with our customers today.
- This is a 5/1 ARM with 1/4 Caps. It is fixed at 4% for five years. Then on year six it starts adjusting annually. The cap shows it cannot increase by more than 1% per year with a lifetime max of 4%.With the Cap that is set on this, this is the worst possible outcome in terms of rates.Click 1: Year 1-5 appearsClick 2: Year 6 appearsClick 3: Year 7 appearsClick 4: Year 8 appearsClick 5: Year 9 appears.Ask where will the rate be in year 10? Explain about the Cap and remind them that it cannot exceed 4% for the life of the loan, so it will stay fixed at 8% (4% more than the initial 4%) for the rest of the loanClick 6: Year 10-30 appearsClick 7: Year 30 appears, showing that the rate stays the sameClick 8: The line appears showing the relationship.
- The interest rate on an ARM will adjust once over the life of the loan? False – it will adjust multiple times based on the term and caps.If someone is on a set fixed income an ARM would be too risky for them? True – they would not want to take the risk of the payment increasing.An ARM could be a great option for a doctor just coming out of medical school? True – their income will most likely increase substantially in the next few years. The initial payment would be lower while they are making less and have debt from school. However, their pay increase should coincide with the possible rate increase and be affordable.
- This chart is very good at showing the adjustment payments of the 3 different types of programs, fixed, buydowns, and ARM’s. Remember our job is to educate and explain. This allows the customer to make a well informed decision on which loan type to get.
- Conventional Financing is something that is not insured or guaranteed by a government agency. They are usually considered to be “standard” loans within the industry.Usually PMI is required on loans with a LTV over 80%.
- There are two types of conventional loans, conforming and non-conforming.Aconforming loan is usually one that meets “normal” investor guidelines. Usually this is under $417,000, but this amountmay vary by area or have additional criteria such as LTV, credit score, or other borrower-specific requirements. A nonconformingloan is also referred to as a “Jumbo” loan. This is a loan that is either over the specified loan amount (again, usually $417,000 but can vary by area) or does not meet the additional specified criteria. Nonconforming Loans usually have higher interest rates than conforming loans because they are deemed to be more risky for the investor.
- The main benefit for conventional is that is usually offers the best rate. Unfortunately, it is usually also the most restrictive in terms of borrower qualification requirements, such as credit score, ratios, etc.Other benefits include no prepayment penalty, so borrowers can pay off their loan early if they desire.Conventional loans can be used on primary residences, secondary residences and investment properties. There may be different requirements for secondary or investment properties, though, so pay attention to the lender profile.Gifts are allowed. Documentation requirements will vary based on program and borrower criteria. At least 5% of the down payment must be from the borrower’s own funds, though.Private Mortgage Insurance is only required when the LTV is over 80%. When it is required, it is also not required for the life of the loan. Once the loan value gets to 80% LTV, the mortgage insurance does not need to be paid anymore.The front end ratio (which indicates the percent of an individual's income used to make mortgage payment) should be no less than 28%. The back end ratio (which is the percent of the housing expense based on all of the borrower’s debts) should be no more than 36%. These are the standard ratios and may change based on specific program or lender guidelines.Some other points to note is that seller contribution can be up to 3% on loans with an LTV over 90%, and 6% on loans with an LTV of 90% or less. Some of the main drawbacks of a conventional loan is that it tends to have the most rigid qualification requirements.
- The Monthly Insurance Premium is paid up front at time of settlement. The amount that is paid depends on the length of the loan, the Loan To Value and whether or not the Loan Amount is considered “high”. The amount can be anywhere from 1.25% to 1.75%. There is also an additional monthly charge that is charged every month for the life of the loan. This is in addition to the Principle and Interest of the actual loan.
- The main benefit of FHA is the lesser requirements for credit scores, income requirements and down payment minimum. This is usually a popular option for first time home buyers, who may not have a lot of funds to put towards closing. The minimum requirement for FHA is only 3.5%.Another benefit of an FHA loan is that it can be assumed by another party. This means that if the house is sold, the buyer can elect to take over the payments at the same rate which the seller originally obtained the loan, provided they qualify.There is no prepayment penalty (on any current NVR product) and gifts are allowed. Always make sure to check the specific loan and lender guidelines for documentation and gift requirements. Non-occupant co-borrowers are allowed, meaning that a borrower can have their parents or another party on the loan to help with qualifying. The ratios are less strict than those required for conventional loans. The standards are usually a front end ratio (again, this is the percent of the housing payment against the borrower’s monthly income) of 31%, and a back end ratio (the housing payment as a percent of total monthly debts) of 43%. Again, these are the standards, so these may change based on specific program or lender guidelines.<<Add about Drawback>>Upfront premium, which can be paid at Settlement or financed in.
- The VA loan was created specifically for veterans to obtain housing without having a lot of cash on hand. It is one of the few programs that does not require a down payment. The Department of Veterans Affairs will actually list the VA Entitlement amount which is the portion of the approved mortgage amount that the VA will guaranty the lender against default of the borrower. This is listed on the back of the Certificate of Eligibility, which the document that shows the eligible and status of a Veteran.However, there are certainly eligibility requirements that someone is required to meet in order to be eligible for a VA loan. Additionally, there is a funding fee that is charged by the Veterans Administration. This is usually between 1.25% and 3.30%. The funding fee amount, however, can be rolled into mortgage amount or paid at settlement. If a veteran has an eligible disability, the funding fee may be waived.
- The main benefit to a VA loan is that there is little (if any) down payment required. The required credit score, income limits and ratios are also more flexible than a conventional loan. The seller can pay any or all settlement costs and discount points, as well as buy down subsidies, prepaids, and debt payoffs that do not exceed the 4% Seller Contribution Limit. There is no prepayment penalty on a VA loan (on any current NVR products).Gifts are allowed for down payments and closing costs, but always make sure to check about documentation requirements. The ratios for VA are also less strict than those required for conventional loans. The standards are usually a back end ratio (the housing payment as a percent of total monthly debts) of 41%. Again, however, these are the standards, so these may change based on specific program or lender guidelines.Some of the drawbacks of a VA loan are the funding fee. It also may not be available over a certain Loan Amount – usually $417,000. It may be available in a “jumbo” now, but this limit varies by location. Additionally, a veteran can only have one VA loan at a time.