Mortgage Payment Plan

Mortgage Payment Plan Information and Guide

A scheduled mortgage payment is the amount the borrower has to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract.  Failing to pay less than the scheduled amount results in delinquency of the mortgage loan. There are multiple mortgage payment plans available and it's up to the mortgage broker to find the borrower a good deal.

 

On type of mortgage payment plan is a Fixed Rate Mortgage (FRM) is a mortgage that has no specification for changing the interest rate. Hence, the rate stated in the note is fixed for the entire term of the loan. Usually, the term "FRM" also means that the payment is fixed for the life of the loan and pays it off over the term. An FRM should essentially be called a "level-payment fully amortizing FRM" to distinguish it from other types of loans that have a fixed rate but not a fixed payment.

 

A fixed-rate mortgage can also have an increasing payment. The version in the US is called a "graduated payment mortgage." The interest-only version of a fixed-rate mortgage also does not have fixed payments. Borrowers begin paying only the interest, which declines if they voluntarily pay any principal, until the end of the interest-only period. At that point, the payment jumps and it becomes a level-payment fully amortizing FRM.

 

On an FRM, the composition of the payment between principal and interest changes every month. At the beginning, it is mostly interest that's paid but the principal portion gradually rises over time. FRMs come with different terms, ranging generally from 10 years to 40 years, with the 15 and 30-year being the most common.

 

Another common mortgage payment plan is known as Adjustable Rate Mortgage (ARM.) An ARM, is a mortgage on which the interest rate is not fixed for the entire life of the loan. The rate is fixed for a period at the beginning, called the "initial rate period", but after that it may change based on movements in an interest rate index. ARMs are contrasted with fixed-rate mortgages (FRMs) on which the quoted rate holds for the entire life of the mortgage.

 

The ARM rate quoted by a lender or broker is the initial rate. It holds until the end of the fixed-rate period, which can last from a month to 10 years. This rate is critically important if the initial rate period lasts for 10 years, but it is very unimportant if the period is only one month. The ARM rate tends to rise with the initial rate period. It is the lowest on ARMs with initial rate periods of a year or less, and highest on the 10-year version, which comes closest to an FRM. Typically, the rate on a 10-year ARM is only .125% or .25% below that of a comparable FRM.

 

There are two phases in the life of an ARM. During the first phase, the rate is fixed, just as it is on an FRM. The difference is that on an FRM the rate is fixed for the term of the loan, whereas on an ARM it is fixed for only a limited period at the beginning. At the end of that period, the rate probably will increase. The initial period of rate stability lasts from one month on a one-month ARM to 10 years on a 10-year ARM. Borrowers choose ARMs mainly for the lower rate at the beginning. In general, the lower the initial rate on an ARM, the shorter the fixed-rate period. In a market in which the 30-year FRM rate is 8%, for example, the initial rate could be 5% on one-month ARMs, 7% on one-year ARMs, and 7.75% on 10-year ARMs.

 

There are a variety of interest rate indexes used with ARMs, and it is necessary to determine exactly which index is used on a particular ARM, and to determine its most recent value. This information is available in many newspapers and on a number of web sites. The margin, usually 2.50 to 3.0%, is stipulated in the ARM contract.

 

The first exception is that the increase from the previous rate cannot exceed the rate adjustment cap, which imposes a limit on the size of any interest rate increase. In most cases, rate  adjustment caps are 1% or 2%, depending on the frequency of rate adjustments. However, on ARMs where the initial rate holds for 5, 7 or 10 years and then adjusts annually, the cap at the first rate adjustment is usually 5%, dropping to 2% on subsequent (annual) adjustments. The second exception is that the new rate cannot exceed the maximum allowable rate on the ARM contract. A maximum rate will usually be about 5 or 6 percentage points above the initial rate. Most ARMs contain both rate  adjustment caps and maximums; some have one but not the other; a few have neither but have payment adjustment caps instead.

 

Whether the adjustable rate mortgage (ARM) or fixed rate mortgage (FRM) turns out better depends on what happens to interest rates in the future, which no one knows. Shoppers faced with this decision should ask themselves "Is this a risk worth taking," and "can I afford to take it?"

 

Many lenders offer mortgage payment plans that differ from the standard monthly payment arrangement.  The inducement is an earlier payoff.  These programs can be confusing, and the claims made for them are often exaggerated.

 

A bimonthly mortgage payment plan involves no extra payments.  You make 24 payments a year instead of 12 but they add to the same total.  By advancing the payment by half a month, you save a little interest, which means that a slightly larger part of succeeding payments is used to reduce principal.

 

A biweekly mortgage is one on which the borrower every two weeks makes a payment equal to half the monthly payment on a standard mortgage.  The payment amount on a biweekly is thus the same as that on a bimonthly.  But since there are 26 biweekly periods in a year compared to 24 bimonthly periods, the biweekly produces the equivalent of one extra monthly payment every year.