Does this look like a good loan?

Question

Hi,

I maxed out on my Fannie loans so I have been searching for portfolio lenders.   I found one that lends at the following terms:

• Interest Rate: 5-year FHLB + 3.00%, floor or 5.95%
• Adjusts every 5 years
• No cap on rate adjustment (Note:  Seems scary)
• Maturity: 20 years
• Require 30% down.
• No prepayment penalty

I am wondering if anyone knows what has been the historical 5-year FHLB rate and any predictions on what it might be in 5, 10, and 15 years since the rate adjusts every 5 years.

The no cap on rate adjustments is the scary part, but I guess I could prepay the loan if the rate goes crazy high.

Does this look like a good options to secure long term financing if I've hit my 10 Fannie Mae loans already?

If not, please let me know any better options.

Thanks,

Dean

Account Closed · Answer

Get back to me for the funds you seek.

Kind regards

Dawn Anastasi · Answer

You may want to keep searching for smaller banks or credit unions.  I found a small bank on my 7th mortgage that is giving me a 30-year fixed amortization.  The interest rate is 5.20% which is higher than traditional 1-4 but I'm happy with getting that for having so many other mortgages already.

Bill Gulley · Answer

I got lost here, with the 5 year "balloon" you said it was with a 20 year maturity with 5 year adjustments, that's a 60/240 ARM. The FHLB is a very stable index and you can watch movement lagging to 1 year T-Bills.

The interest will be changed based on an index date, not an average, usually within 60 days of the original note date or on the note date with payments changing on or after that note date (if the rate is changed 60 days prior based on that date, your new rate is not charged until the note date when a new payment will be required 30 days* later. If it changes on the note date obviously notice of the change must be given, so the new payment requirement will follow) (* depends on you payment as scheduled)

When rates change on any ARM the rate is applied to the unpaid balance and it is re-amortized  over the remaining months. ARMs are identified in monthly terms, 60/240, so in 60 months the loan will adjust over the remaining 180 months, then 120 months, then 60 months and you're done.

Keep in mind that the margin is 3 points, if this loan goes sky high that means current rates will be about the same on the street, unless you find a "sucker rate" and that may climb to compensate for any low entry rate. So really, considering loan costs, you may not be better off in refinancing in the future as this loan rate increases. Roll the dice!  :)

David Beard · Answer

As you describe it, with a 20 year maturity and a stated index and margin, it is in fact a 5/5 ARM, and not a balloon.

James Syed · Answer

@Dean Suzuki I just sent you PM as well.

Here is my second response.

Yes, it means at the end of 5 years, your note will be due and if you want to refinance with them, they will offer you the current interest rate for the subject property at that time.

Your loan is amortized over 20 years meaning you will be making payments as you will be paying this loan for 20 years, but in realty your loan will be due at the end of 5 years.

There is no automatic rate adjustment. I assert you are confusing this with ARM. It's NOT an ARM loan where rate adjust itself after sometime. In this type of loan (balloon), your note is due and you have a choice either pay off the mortgage or refinance.

Does it help Dean?

James Syed

Dean Suzuki · Answer

Thanks everyone for the feedback.   This is my first time looking at loans that are not 30 year fixed.   So, these new terms and rates are all new to me.

Does this loan mean that in 5 years that the rate will adjust based upon the 5 year ARM FHLB.  Then, balanced upon on the outstanding balance, does the bank recomputed a 15 year amortization at the new rate?  Then at 10 years, the rate re-adjusts and the bank recomputes the a 10 year amortization at the new rate?   Is that how this loan works?

Thanks,

Dean

James Syed · Answer

@Dean Suzuki your loan terms, rate seem to be norm. I have portfolio lender offering me 5.25% fixed for 5 years (balloon mortgage) amortized over 20 years with 75% LTV.

You will not find rate fixed for 30 years.

Hope it helps.

David Beard · Answer

I agree that the LTV cap of 70% could be higher.  The 20-year loan is better than a 20-year note that balloons in 5 years, which is what most banks want to do these days.  At least the money is guaranteed to be available for 20 yrs, even if the rate spikes.  The best loan would be a 20-30 yr ARM, 80-85% LTV, with an annual/life increase limit of 2%/6% (I've seen 2%/5% as well, but much less common).  I'd wear out the phone trying to find that alternative, or a straight 15-year fixed, which might be a real toughie.

The 5-year FHLB borrowing rate (for banks) is currently about 2.1%.  In the last decade, it has been as low as 1% and as high as 6%.  However, it rose above 7.5% back in 2000.  Predictions?  That's the realm of crystal balls.  Higher, I dare say.  The rate just follows FHLB bond prices, which move roughly in tandem with treasurys since the FHLB is a GSE with an implicit guaranty.

Justin B. · Answer

it's not bad, but I'm consistently getting 5.75% and 10% down (even got 5% down on the last one).  20-year ammoritized with a 5-year call (so we refinance every 5 years at a minimum).