Resources
Examples of Loans
That May Be Predatory
Adjustable-Rate Mortgage (ARM)
A mortgage without a fixed interest rate. The rate changes during the life of the loan in line with movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index.
Amortizing Loan
Monthly payments are large enough to pay the interest and reduce the principal on your mortgage.
Exotic Mortgage
Mortgages that have an interest-only, payment-option, piggy-back or minimum payment features.
Interest-Only Loan
You to pay only the interest for a specified number of years, after that, you must repay both the principal and the interest. Most mortgages that offer an interest-only payment plan have adjustable interest rates, meaning that the interest rate and monthly payment will change over the term of the loan. The changes may be as often as once a month or as seldom as every 3 to 5 years, depending on the terms of your loan. For example, a 5/1 ARM has a fixed interest rate for the first 5 years; after that, the rate can change once a year (the "1" in 5/1) during the rest of the loan. The interest-only payment period is typically between 3 and 10 years. After that, your monthly payment will increase, even if interest rates stay the same, because you must pay back the principal as well as the interest. For example, if you take out a 30-year mortgage loan with a 5-year interest-only payment period, you can pay only interest for 5 years and then both principal and interest over the next 25 years. Because you begin to pay back the principal, your payments increase after year 5.
Introductory Period Loan
Many option ARMs have a 1-month or 3-month introductory period at the beginning of the loan. During this period, lenders use a lower interest rate to calculate your payments. For some interest-only mortgage payment loans, this introductory period lasts 1, 3, or 5 years.
Low or No Documentation Loan
A lender will charge a higher interest rate because borrowers do not have to provide as much or any documentation about their income.
Negative Amortization
When the monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan.
Payment-Option ARM
A payment-option ARM is an adjustable-rate mortgage that allows you to choose among several payment options each month. The options typically include three choices. (1) A traditional payment of principal and interest, which reduces the amount you owe on your mortgage, where payments may be based on a set loan term like a 15, 20 or 40 year payment schedule. (2) An interest-only payment, which does not change the amount you owe on your mortgage. (3) A minimum or limited payment, which may be less than the amount of the interest due that month and may not pay down any principal, which means if you chose this option, the amount of interest you do not pay will be added to the principal of the loan, increasing the amount you owe and increasing the interest you pay.
Pick-A-Payment Loan
The loan allows borrowers to make a minimum-payment which is less than what the amortization would be required to pay down the interest and a portion of the interest of the loan. Similar to a credit card, you loan size could increase instead of decrease, putting borrowers into payment shock when the increasing loan sizes reach a ceiling and result in higher payments.
Sub-prime Loan
Loans that are more expensive than traditional mortgages because the interest rates are higher than a traditional loan. They are typically given to borrowers with a credit score of 620 or less.
Loan Examples
5/1 Traditional ARM
If you borrow $180,000, the monthly payment stays at $1,126 for 5 years but then changes with the interest rate. In the example, the monthly payment would be $1,344 if interest rates rose 2% in year 6. A 5/1 ARM is an ARM in which the rate is fixed for the first 5 years and then may adjust every year during the remainder of the loan term.
Fixed-Rate 5-Year Interest-Only Mortgage
If you borrow $180,000, the monthly payment stays at $1,035 for the first 5 years and then increases to $1,261 in year 6 as you begin to pay down the principal.
5/1 Interest-Only ARM
If you borrow $180,000, the monthly payment stays at $960 for 5 years but increases to $1,204 in year 6. The payment rises because interest rates are rising and because you did not pay down the principal during the first 5 years. If interest rates rose 2%, the monthly payment in year 6 would be $1,437.
Payment-Option ARM with Minimum Monthly Payment
If you borrow $180,000, the minimum monthly payment starts at $630, but this amount does not cover all of the interest ($957). The payment rises 7.5% each year (payments are $677 in year 2, $728 in year 3, $783 in year 4, and $842 in year 5). The loan is recast at the beginning of year 6. If interest rates stay the same, the monthly payment would be $1,308. If interest rates go up 2%, the monthly payment would be $1,562.
2-28 or 3-27 Loan (A Predatory Loan)
Predatory loans make up 70% of the sub-prime market. The loan has a very low teaser interest rate for the first two year and then jumps exponentially, often 30-50% more, also called an exploding ARM.
Adjustable-Rate Mortgage (ARM)
A mortgage without a fixed interest rate. The rate changes during the life of the loan in line with movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index.
Amortizing Loan
Monthly payments are large enough to pay the interest and reduce the principal on your mortgage.
Exotic Mortgage
Mortgages that have an interest-only, payment-option, piggy-back or minimum payment features.
Interest-Only Loan
You to pay only the interest for a specified number of years, after that, you must repay both the principal and the interest. Most mortgages that offer an interest-only payment plan have adjustable interest rates, meaning that the interest rate and monthly payment will change over the term of the loan. The changes may be as often as once a month or as seldom as every 3 to 5 years, depending on the terms of your loan. For example, a 5/1 ARM has a fixed interest rate for the first 5 years; after that, the rate can change once a year (the "1" in 5/1) during the rest of the loan. The interest-only payment period is typically between 3 and 10 years. After that, your monthly payment will increase, even if interest rates stay the same, because you must pay back the principal as well as the interest. For example, if you take out a 30-year mortgage loan with a 5-year interest-only payment period, you can pay only interest for 5 years and then both principal and interest over the next 25 years. Because you begin to pay back the principal, your payments increase after year 5.
Introductory Period Loan
Many option ARMs have a 1-month or 3-month introductory period at the beginning of the loan. During this period, lenders use a lower interest rate to calculate your payments. For some interest-only mortgage payment loans, this introductory period lasts 1, 3, or 5 years.
Low or No Documentation Loan
A lender will charge a higher interest rate because borrowers do not have to provide as much or any documentation about their income.
Negative Amortization
When the monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan.
Payment-Option ARM
A payment-option ARM is an adjustable-rate mortgage that allows you to choose among several payment options each month. The options typically include three choices. (1) A traditional payment of principal and interest, which reduces the amount you owe on your mortgage, where payments may be based on a set loan term like a 15, 20 or 40 year payment schedule. (2) An interest-only payment, which does not change the amount you owe on your mortgage. (3) A minimum or limited payment, which may be less than the amount of the interest due that month and may not pay down any principal, which means if you chose this option, the amount of interest you do not pay will be added to the principal of the loan, increasing the amount you owe and increasing the interest you pay.
Pick-A-Payment Loan
The loan allows borrowers to make a minimum-payment which is less than what the amortization would be required to pay down the interest and a portion of the interest of the loan. Similar to a credit card, you loan size could increase instead of decrease, putting borrowers into payment shock when the increasing loan sizes reach a ceiling and result in higher payments.
Sub-prime Loan
Loans that are more expensive than traditional mortgages because the interest rates are higher than a traditional loan. They are typically given to borrowers with a credit score of 620 or less.
Loan Examples
5/1 Traditional ARM
If you borrow $180,000, the monthly payment stays at $1,126 for 5 years but then changes with the interest rate. In the example, the monthly payment would be $1,344 if interest rates rose 2% in year 6. A 5/1 ARM is an ARM in which the rate is fixed for the first 5 years and then may adjust every year during the remainder of the loan term.
Fixed-Rate 5-Year Interest-Only Mortgage
If you borrow $180,000, the monthly payment stays at $1,035 for the first 5 years and then increases to $1,261 in year 6 as you begin to pay down the principal.
5/1 Interest-Only ARM
If you borrow $180,000, the monthly payment stays at $960 for 5 years but increases to $1,204 in year 6. The payment rises because interest rates are rising and because you did not pay down the principal during the first 5 years. If interest rates rose 2%, the monthly payment in year 6 would be $1,437.
Payment-Option ARM with Minimum Monthly Payment
If you borrow $180,000, the minimum monthly payment starts at $630, but this amount does not cover all of the interest ($957). The payment rises 7.5% each year (payments are $677 in year 2, $728 in year 3, $783 in year 4, and $842 in year 5). The loan is recast at the beginning of year 6. If interest rates stay the same, the monthly payment would be $1,308. If interest rates go up 2%, the monthly payment would be $1,562.
2-28 or 3-27 Loan (A Predatory Loan)
Predatory loans make up 70% of the sub-prime market. The loan has a very low teaser interest rate for the first two year and then jumps exponentially, often 30-50% more, also called an exploding ARM.
Helpful Information
Create a budget so you can stay out of debt and avoid the possibility of foreclosure again.
Keeping Track
There is only so much money from month-to-month. Where does it all go?
A sizeable portion pays for housing, food and basic living. Another portion pays for transportation. But where does the rest go?
Budgeting allows you to track your monthly expenditures so that you can plan key savings strategies for important short- and long-term goals.
Limit Your Spending
Having a financial budget may find that about 5-10% of your total spending may be for purchases that are not needed.
Think about it. What could you do with that extra 5-10%? Perhaps your future plans include buying your first home, going back to school, saving for your child's college, paying down debt or simply setting aside cash for a special trip.
A budget will identify expenses that can be cut so that you can set goals on making important long-term savings.
Discipline Yourself
Your goal is to rid yourself of instant gratification (the symptom of credit card use). The budget sets guidelines on what and when items can be purchased.
Setting Goals
Budgeting supports your financial goals, which may include:
— saving for your first home
— paying down debt
— preparing to go back to school
— planning for retirement
Good budgeting skills add these goals into the budget.
Prepare for Emergencies
If you were to lose your job, how long could you survive on available funds?
If you had to stretch those funds, what reductions can you make in your existing monthly expenses?
That is the key benefit of a budget. It helps prepare for emergencies with established expense reduction plans.
What's In The Budget
Income
The budget starts with how much money you bring home on a monthly basis. Income sources include:
— employment income
— alimony received
— investment income
— social security
— support payments
— savings
How much income should be allocated for the budget?
— your goal should be around 90-98% or less
— the remaining 2-10% of your income gets allocated for savings
(note: budget items are expressed in monthly terms)
Housing Expenses
Housing expenses will likely be your largest expense item, especially if you own a home. Housing expenses include:
— your mortgage payment with escrow (taxes, insurance)
— monthly rental payment if you do not own
— utility services (electric, gas, oil, water, sewage, garbage, etc.)
— telephone, internet, cable
— house repairs and maintenance
How much for the budget?
— about 32-35% of income if you own; 15-20% if you rent
(note: budget percentages can vary by region and situation)
Transportation
Transportation expenses include:
— auto loan payments
— auto insurance
— fuel expenses
— maintenance and repairs
— taxes, licensing
— parking
— public transportation
How much for the budget?
— about 9-12% of income
(note: budget percentages can vary by region and situation)
Family or Personal Care
Family care expenses include:
— family care insurance (health, disability, life, dental, other care)
— doctor, dental, eye care, hospital visits
— veterinarian expenses
— prescriptions and over-the-counter medications
— child care
— elder care
— health clubs
How much for the budget?
— about 8-19% of income; 15-25% for full child/elder care services
(note: budget percentages can vary by region and situation)
Living Expenses
Home living expenses include:
— food
— home living supplies
— school and work lunches
— snacks, vendors
— clothing
— education-related expenses
— home services (cleaning, gardening)
— postage and paper supplies
How much for the budget?
— about 27-35% of income
(note: budget percentages can vary by region and situation)
Family Recreation
Recreation expenses include:
— dining out
— movies out and rentals
— outside entertainment
— cigarettes, beer, wine, liquor
— birthdays and holidays
— vacation travel
— weekend, day trips
— gambling, lottery tickets
How much for the budget?
— about 4-6% of income
(note: budget percentages can vary by region and situation)
Obligations
Obligation expenses include:
— credit card payments
— student loan payments
— home equity line or loan payments
— personal loan payments
— alimony, child support payments
— judgment or liens
— other assessed taxes
— charitable donations
How much for the budget?
— about 18-28% of income (your goal is to reduce this percentage)
(note: budget percentages can vary by region and situation)
Savings
Savings include:
— 401K contributions
— IRA contributions
— investments
— savings (personal, college, retirement)
How much for the budget?
— about 2-10% of income (goal is to increase this percentage)
(note: budget percentages can vary by region and situation).
Resource Links
The Young Law Group, PLLC
New York Clients - Check to see if your property is in Foreclosure: Click Here
