Sunday, November 13, 2005

Some general mortgage info...and answers to some posted questions my whole point in doing this blog is to give MY opinion of what I am seeing in this industry. Apparently, people think that is a pretty cool thing....somebody in the industry that is not all smoke and mirrors and who will give a straight opinion of what they are seeing on a daily basis.

So that said...I'd like to answer some questions that have been posted...and give some general mortgage info.

1. What is a pre-pay penalty?!?!? A pre-pay penalty is just that...a penalty for paying off your loan before a set period of time. Pre-pay penalty's can be "bought out" in the form of higher rates (usually 1-1.5 points added to the rate). Most of your subprime loans and "creative" financing loans have them. Most 2/28's will have a 2 yr ppp (ppp=pre pay penalty), most 3/27's will have a 3 yr ppp, and most of the "option-ARM's" are SOLD with a 3yr ppp (I'll talk more about the option ARM's below).

There are 2 types of pre-pay penalties: soft and hard (yes...the hard one "hurts" more). Companies have different rules with regards to the pre-pay and the type of loan. Lots of "a-paper" loans will have a soft prepay, which means, that if you refi with that company, they waive the per-pay penalty, or if you sell the property, they will waive the penalty. With a hard prepay...there are NO exceptions for any reason. You refi or sell during the set timeframe and you will pay the penalty.

Most ppp's are 6-months interest, or something close to that. The pre-pay penalty is there for the investors. Since most loans are packaged and sold within 30-90 days, the investors of these loans are looking for X amount of return of a period of time. If the loan is refi'd or the property sold, the investor is no longer getting paid. So therefore, when somebody refi's etc, the penalty helps make the investor whole. I know that is a rough explanation...but I hope it makes sense.

2. Here is a quick list of mortgage terms and what they mean:

- ARM - adjustable rate mortgage

- 2/28 - that is an ARM that is fixed for 2 years, then adjusts for 28 years. These are sold to "get people in" with the hope of refi'ing them again in 2 years (or less). This term is usually used with "subprime" and alt-a lending.

- 3/27 5/25 - same as the 2/28 just the "fixed" period is for a longer period of time.

- 3/1 5/1 7/1 10/1 ARMS. These are the tradional ways A-paper talks about their ARM products. The first number being the length of time the rate is fixed for.

- I/O - interest only

- SFR - single family residence. Detatched...not a condo or townhome.

- "option - arm" - these loans have 4 (usually) payment options each month. I will make a whole post after this regarding these loans.

- FICO scores - the industry standard for measuring a bwrs credit risk. there are 3 credit bureaus (equifax, transunion, experian) which are the industry standards. Scores range from approx 300-850. 700+ is generally referred to as A-paper.

I think that is about it for now....I can add more as people request them.


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