TRAINING TIP:
ADJUSTABLE-RATE MORTGAGE (ARM) LOANS
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ARMs Training Guide
ADJUSTABLE-RATE MORTGAGE (ARM) LOANS AFFORDABLE RATES, LOW MONTHLY PAYMENTS, AND MORE BUYING POWER DETAILS:
An adjustable-rate mortgage (ARM) is a home loan that features a low initial fixed-interest rate, followed by periodic rate adjustments (variable interest rate). Initial ARM rates are typically much lower than fixed-mortgage rates, sometimes by a full percentage point or more, which reduces monthly mortgage payments and increases a member’s buying power. • We will feature the 5/1 and 5/5 loans, and we’re working on offering additional ARM loans later this year • We can loan up to 90% loan-to-value (LTV) with no mortgage insurance • We offer up to $1,000,000 ARM loans
DATES:
ARM loans will be offered starting Thursday, July 14, 2022.
COLLATERAL FOR MEMBERS: Coming Soon
CAMPAIGN PURPOSE:
Our goal is to provide a more affordable option for members who are currently in the market to buy a home. An increase in mortgage loans improves the company’s bottom line and contributes to our Scorecard results. With climbing interest rates, this option gives members a chance to get a lower initial interest rate, which reduces monthly mortgage payments and increases a member’s buying power.
ARMs Training Guide
TALKING POINTS: • ARMs typically provide lower initial interest rates than fixed-rate home loans, sometimes by a full percentage point or more • ARMs have periodic and lifetime rate caps, so there are limits on how much rates and payments can increase when rates adjust upward and in total. Also, if rates adjust downward, the member’s rate and payments will actually decrease (If the index adjusts downward, the member’s rate will actually decrease during the adjustable period)! • An ARM can be a good choice if a member thinks their income will increase over time. Payments may go up, but the member’s salary most likely will, too, which will help keep payments affordable. • No prepayment penalties if you decide to refinance into a fixed-rate loan • Since loans are serviced in house, members can expect great service for the life of their loan • Members can manage their mortgage online without any hidden fees • Mortgage Loan Officers are available via email and phone to help members understand whether an ARM is right for them • Credit Union advantages: > Fast, reliable closing > Low fees > Local service • Special Programs for Law Enforcement Personnel: > Complimentary End of Watch Debt Protection • Free educational resources and workshops for buyers available through BALANCE Financial: lapfcu.balancepro.org
IMPORTANT NOTE: Only Associates with a Nationwide Mortgage Licensing System (NMLS) ID number and license in good standing can quote rates for members. Staff without an NMLS ID # may share rates posted on LAPFCU’s website and discuss product types, but may not discuss rates based on members’ FICO score, loan-level price adjustments (LLPAs), fees, and other items related to mortgage loans.
ARMs Training Guide
FREQUENTLY ASKED QUESTIONS: Q: How does an ARM work? A: An ARM provides a low introductory rate that’s typically lower than average fixed-rate mortgages. • The rate remains constant for a fixed period of time, usually 3, 5, or 10 years. • When the fixed-rate period ends, the interest rate will adjust up or down based on an index + margin, such as the Constant Maturity Treasury (CMT) rate (There are two indices under the CMT. The 5-year CMT index is tied to the 5/5. The 1-year CMT index is tied to the 5/1). • There are periodic and lifetime rate caps, which limit how much rates and payments can increase when rates adjust upward and in total. • ARMs are 30-year loans, meaning a member will pay back the money they borrowed over a period of 30 years.
Q: How is an ARM interest rate calculated? A: An ARM Interest rate = Index + Margin • INDEX: A benchmark interest rate that reflects general market conditions. The index changes based on the market. Changes in the index, along with the loan’s margin, determine the changes to the interest rate for an adjustable-rate mortgage loan. • MARGIN: The number of percentage points added to the index by a mortgage lender to set the interest rate on an ARM after the initial rate period ends. The margin is set in the loan agreement, and won’t change after closing.
Q: What types of ARMs will we feature? A: LAPFCU will feature the following ARMS now (but we will introduce other options later): • 5/1 ARM: low, fixed rate for 5 years, then adjusts annually • 5/5 ARM: low, fixed rate for 5 years, then adjusts every 5 years
Adjustable-Rate Mortgage
Rate (At 360 months)
5/1 ARM
4.00%
5/5 ARM
4.125%
EXAMPL O N LY
E
APR (At 360 months)
Monthly Payment (At 360 months; excludes tax & insurance)
4.957%
$1,432
5.519%
$1,454
ARMs Training Guide
Q: What is the difference between a fixed-rate mortgage and an ARM? A: The main difference between a fixed and adjustable-rate loan is: • The interest rate never changes on a fixed-rate mortgage • An ARM’s interest rate can change during the adjustable time period. Depending on the market, the rate can either lower by no less than the floor rate or raise by no more than the product cap rate. The monthly mortgage payment will change, also, if the index rises/falls.
Q: Who might be interested in an ARM? A: A member might benefit from an ARM if they: • Want lower payments and more purchasing power • Don’t plan to stay in their home forever • Are buying one house and selling another at the same time • Are buying their first home • Anticipate a future income increase • Plan on paying more than the minimum monthly payments on the loan
Q: What are the benefits of an ARM? A: Key benefits for ARM loans are: LESS EXPENSIVE
Initial ARM rates are much lower than fixed-mortgage rates, sometimes by a full percentage point or more
LOW MONTHLY PAYMENTS
Qualify for a larger loan and enjoy lower interest rates
LOW DOWN PAYMENT
Put as little as 10% down, or refinance up to 90% of your home’s value
MORE BORROWING POWER
Qualify for a larger loan and/or a more expensive home
PAY MORE TOWARD LOAN PRINCIPAL
Lower interest rates mean more of your payments go toward principal
FALLING RATES
There’s a possibility monthly payments could go down during the adjustable-rate period if interest rates fall
ARMs Training Guide
Q: How can a member qualify for an ARM? A: Members must meet the following criteria to qualify for an ARM: • Loan-to-value ratios for owner-occupied and second homes: > Up to 90% with a 700+ credit score > Up to 80% with a 620-699 credit score • Credit requirements: > Acceptable credit with no derogatory information > No previous foreclosure, deed in lieu or settled real estate loans > Debt-to-income ratio of no more than 45%
Q: Is it easy for a member to qualify for an ARM? A: Lenders examine how much income a household brings in a month versus how much is spent each month, or the debt-toincome (DTI) ratio. This is a major factor in loan determination. If someone has a high DTI ratio, they may have an easier time qualifying for an ARM than a fixed-rate mortgage due to the lower interest rate. Q: What are the minimum and maximum loan amounts for an ARM? A: Minimum and maximum loan amounts are: • $50,000 minimum • $1,000,000 maximum Q: How do ARM loan rate caps work? A: ARM loan rate caps limit the amount the loan’s interest rate can rise or drop in a single period and over the lifetime of the loan. The loan might not increase or decrease exactly along with the market if it hits its cap. • Initial cap: The maximum percentage the rate can increase or decrease in a single period after the fixed-rate period expires • Periodic cap: Limits the maximum amount that an interest rate can change from one adjustment period to the next • Lifetime cap: Limits the total amount that the interest rate can increase or decrease (floor rate) from the introductory rate over the mortgage term
ARMs Training Guide
Q: What does a fixed-rate period mean with an ARM loan? A: Adjustable-rate loans use a special series of numbers to describe the initial adjustable-rate period and variable-rate periods. • 1st number: How long the fixed-interest rate lasts • 2nd number: How often the interest rate can change after the initial fixed-rate period For 5/1 and 5/5 loans: • 5/1 ARM: Fixed rate for 5 years, then the rate may adjust based on the market every year for the next 25 years > The margin for the 5/1 loan is 2.50, which means that the rate will never be below that value (also known as the floor rate) • 5/5 ARM: Fixed rate for 5 years, then the rate may change every 5 years based on the market for the next 25 years > The margin for the 5/5 is 2.75, which means that the rate will never be below that value (floor rate) ARM caps are expressed as a series of three numbers: • 1st number: Initial Cap-How much your loan can increase or fall during the first adjustment period • 2nd number: Periodic Cap-The amount can increase or decrease with every periodic adjustment after that • 3rd number: Lifetime Cap-How much your loan can increase above the initial rate over the lifetime of the loan (the maximum rate the loan can ever be) For example, an ARM with a 2/2/5 cap structure means that in the initial rate change, the max increase or decrease is 2.00%. All other subsequent changes have a max increase or decrease of 2.00%. The Lifetime cap is 5.00% added to the rate which is the total Lifetime rate cap on the loan in the adjustment period.
Q: Will PMI be required on an ARM Loan? A: No PMI is required for 5/1 and 5/5 ARMs, but members must put at least 10% down. Q: How can a member determine if they are a good candidate for an ARM? A: Ultimately, a member should consult with their tax specialist or financial advisor before choosing a mortgage loan. Advisors consider a wide range of personal factors and balance them with the economic realities of an ever-changing market. Q: How are today’s ARMs different from those offered previously, especially in the early 2000s? A: Some of the riskiest features of previous ARMs—prepayment penalties, negative amortization, interest-only—that kept borrowers locked into loans with expensive terms are no longer allowed. ARM mortgages are also protected by caps in rate increases and lifetime limits.
ARMs Training Guide
Q: Can a member refinance an ARM? A: Yes, a member can refinance an adjustable-rate mortgage. When interest rates are low, refinancing an ARM can give a member the stability of the same monthly payment for years to come. Refinancing can also help members consolidate debt or pay off a mortgage faster by shortening the term. CONTACT: Any questions? Contact Kiona McGlothen at kmcglothen@LAPFCU.org (818) 779-3389 or Jorge Arriaga at jarriaga@lapfcu.org or (818) 779-3259. OTHER Q3 CAMPAIGNS/MEMBER COMMUNICATIONS: • Home Loans and HELOC (Home Equity Line of Credit): Online and mobile banking prompts, digital ads, and email – July • CUSO Financial Services: Letter, emails, and prompts with information about helpful investment and retirement planning services in a volatile economy – July • Consumer Loans Refi Offer: Members get $200 when they refinance a vehicle loan, personal loan, or credit card debt from another lender with LAPFCU. Plus, no payments for 90 days on auto loans only. Eligible loans must be a minimum of $10,000. Offer has been extended until year end. • Summer Lettercheck: Letter with pre-approved personal loan offer – July 26-Sept. 24 • Loan Engine Wave 31: Emails and letters with pre-approved vehicle loans and invitations to apply for real estate loans – July 28-Oct. 28.