A 3-to-1 repurchase mortgage is a type of loan that charges lower interest rates for the first three years. In the first year, the interest rate is 3% lower; in the second, 2% lower; and in the third year, 1% lower. After that, the borrower pays the full interest rate on the rest of the mortgage. For example, with a 5% 30-year mortgage, the interest rate would be 2% in the first year, 3% in the second year, 4% in the third year, and 5% for the remaining 27 years.
An adjustable-rate mortgage (ARM) is a loan with an interest rate that will change over the life of the mortgage. This means that, over time, your monthly payments may increase or decrease. It's easier to force a person who is unable to repay the loan to opt for a loan with a lower down payment. Lenders usually use the fully indexed rate to qualify for an ARM loan, rather than the lower initial rate.
On an ARM loan, any point payment can only keep the rate low during the introductory rate period, and rates will increase significantly thereafter. Initial payments can be quite low during the preliminary rate period, but when rates are restored after the fixed period of a hybrid arm loan, payments can increase hundreds of dollars a month even due to relatively small changes in interest rates. Often, lenders test your eligibility for ARM based on the fully indexed loan rate, which is the highest they could reach after the adjustment. However, keep in mind that this scenario is unlikely and you probably won't pay the highest possible rate over the term of your loan.
If a loan is indexed with respect to the COFI with a margin of 3%, if the COFI goes from 1.9% to 2.7%, the ARM interest rate would rise from 4.9% to 5.7% APR. If no results are shown or if you want to compare rates with other introductory periods, you can use the product menu to select loan rates that are reinstated after 1, 5, 7, or 10 years. They would charge a fixed interest rate for 3% 26 to 10 years, respectively, and then the loans would be repaid at a variable interest rate for the remaining 27 & 20 years, respectively. ARMs can charge lower interest rates than fixed-rate loans because they help banks manage the mismatch between assets and liabilities by transferring part of the risk of changing interest rates to the homebuyer.
This type of loan offers lower upfront rates and payments, but still offers the security of a fully amortized schedule that starts paying off the loan balance from day one. In general, 3-2-1 repurchase loans are available only for primary and secondary homes, not for investment properties. IO loans usually charge a fixed interest rate during the introductory IO period, but some loans may also charge variable rates during the interest-only portion of the loan. The CFPB published a consumer manual on adjustable-rate mortgages, which provides consumers with an introductory guide to ARM loans that includes a worksheet for searching for mortgages.
ARM loans reduce initial monthly housing payments, which can help young people with significant student loan debt qualify for a loan that may be beyond the reach of a fixed-rate mortgage.