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How Does an MTA Mortgage Work? |
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Every month, you can elect to make one of four different
payment options. These options will arrive to you monthly in
your mortgage statement. The four payment options are:
1. Minimum Payment
One of the lowest mortgage Payments in the US. This can
result in some Principal and Interest being deferred
(Negative Amortization) during the first 5 Years. Any
payment that is below the interest only payment, you will
defer that interest and the amount will be added to the
Mortgage. This minimum payment can increase by 7.5%.
Regardless of where interest rates go, this payment will be
available for the first 5-years of the loan.
2. Interest-Only Payment
This will insure no negative amortization and still provide
a low interest only payment. This payment is based off the
fully indexed rate.
3. 30-Year Payment
This payment is the 30-year, principal and interest payment.
This payment is based off the fully indexed rate.
4. Pay 15-year payment
This payment is the 15-year, principal and interest payment.
This payment is based off the fully indexed rate.
Why Pay the Minimum Payment?
The minimum payment can allow a borrower to increase their
cash flow by reducing their mortgage payment. People use the
cash flow savings to:
1. Debt Reduction - Use the extra savings to pay off
more expensive debts that carry higher interest.
2. Investment- Apply the savings to an investment
that will pay a higher rate than the mortgage.
3. Expedite the 2nd Mortgage Payoff- The borrower can
pay off a higher rate second mortgage.
Some borrowers may never elect to pay the minimum payment.
However, they have the peace of mind knowing that they can
always afford the minimum payment.
Who is ideal for an MTA mortgage?
1. Fluctuating Income - People that have income that
varies from month to month often prefer knowing that they
can pay less when times are tough and more when business is
better. Commission, Self-employed, seasonal and gratuity
based positions are perfect for this loan.
2. Landlords- This loan carries great terms on
Investment properties. If a renter does not pay or the
property is vacant longer than expected, the minimum payment
can help keep the cash flow loss to a minimum.
3. High Cost Housing- A 30-year mortgage is often
times too expensive. This loan will allow a borrower to
afford a much more expensive home while keeping the monthly
payments low while still having a fixed and predictable
payment for the first five years while the minimum payment
is available.
4. Investors - Because of the ability to increase
cash flow, this loan will naturally appeal to the savvy
investor. If you can make a safe 10% investment from the
cash flow savings on the MTA mortgage rate, you can clearly
make money while taking advantage of the mortgage tax
advantages.
5. Future Income - People that are going to increase
their pay over the next 5 years and wish to live in a more
expensive home now. These people can make the minimum
payment until they get the raise or income that they are
expecting in the future.
What are the disadvantages to the MTA Mortgage?
1. Adjustable - No matter how you slice it, this
mortgage is adjustable. For people who do not intend on
utilizing the MTA mortgage flexible loan options and intend
on living in their home for 30 years, you may be better off
in a 30-year fixed mortgage. Because 30-year fixed mortgages
rates are so low right now, you may as well lock in the
30-year fixed rate instead of opt for an adjustable mortgage
that will, over time, exceed the current 30-year mortgage
rates.
2. Little or $0 Down Payment - The MTA mortgage does
not allow for less than a 5% down payment. If you require
100% financing and wish for a low payment, you should
consider 1, 3, 5 year interest only ARMS.
What is an Index?
An index is an independent, published economic indicator.
The following indices are tied to a option arm: the 12-Month
Treasury Average Index (12-MTA), the 11th District Cost of
Funds Index (COFI), the 1-Year Constant Maturity Index (CMT)
and the Cost of Savings Index. Lenders use indices to
establish the interest rate for an adjustable rate mortgage.
Additionally, ARM rates follow the movement of these
indices. The lender adds a specified number of percentage
points, called a margin, to the index to establish the
actual ARM interest rate.
What is the 12-MTA?
The 12-Month Treasury Average Index (12-MTA) is based on
average annual yields on U.S.
Treasury Securities adjusted to a constant maturity of one
year, as made available by the Federal
Reserve. The 12-month average is determined by adding
together the annual yields for the most
recently available 12 months and dividing by 12.
Stability: The 12-MTA
The 12-MTA Index does not move up or down as rapidly as
other market interest rates because
the 12-MTA is an average of annual yields on U.S. Treasury
Securities over a 12-month period.
As a result:
· Higher yields are offset by lower yields on a monthly
basis throughout the year
· It creates an index which is far less volatile than other
pure-rate indices
· Interest rate increases take longer to affect the 12-MTA
than other ARM indices
Historically, home loans tied to the 12-MTA have not
exhibited sharp interest rate increases such
as those that occurred in the late 1980s.
MTA vs. Other Indices
The MTA is a very slow index. The index is nearly as stable
as the world's most stable index, The Cost of Savings Index.
However, MTA mortgages generally have better margins which
are fixed through the lifetime of the mortgage. Because the
MTA is an average annual yields on U.S.
Treasury Securities there is an inherent "lag" in the index
which ultimately causes the index to move very slowly.
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