PenFed 5/5 ARM: Is it fully ammortizing, or interest only?

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bhuser01
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Joined: Mon Sep 27, 2010 1:48 pm

PenFed 5/5 ARM: Is it fully ammortizing, or interest only?

Post by bhuser01 »

Could someone point out to me, if the PenFed's ARM product (5/5) is a 30 year fully ammortizing ARM or an interest only ARM. I would like to see something on their website. I was looking at this calculator http://www.bankrate.com/calculators/mor ... lator.aspx and it indicated that an ARM could be interest only.

People who have taken this loan: Did you ever see an amortization table?

Any pointers will be helpful.
MichDad
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Joined: Sat Apr 20, 2013 3:50 pm

Re: PenFed 5/5 ARM: Is it fully ammortizing, or interest onl

Post by MichDad »

We have one of these PenFed 5/5 ARMs. I am virtually certain that the principal and interest are both set to amortize over 30 years. I don't recall seeing an amortization table with my loan documents. We are using this product to pay off the remaining principal balance on our home in less than five years so the question you've asked is less important to us.

I liked the fact that there were no closing costs and our interest rate was very low. I completed most of the paperwork on-line. PenFed sent someone to our house to conduct the closing. We've refinanced our house several times over the years and it was appraised each time. The appraiser PenFed sent was the most thorough I've seen. All in all, I felt PenFed gave us terrific service.

I recall confirming with the customer service representatives that in the event we still have a small remaining principal balance after five years, the new interest rate would be calculated off that small balance and therefore any interest payments would themselves be quite small, even if those rates increased by the maximum allowed (which I believe is two percent above our current interest rate).

I hope this helps.

MichDad
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jimb_fromATL
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Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: PenFed 5/5 ARM: Is it fully ammortizing, or interest onl

Post by jimb_fromATL »

bhuser01 wrote:Could someone point out to me, if the PenFed's ARM product (5/5) is a 30 year fully ammortizing ARM or an interest only ARM. I would like to see something on their website. I was looking at this calculator http://www.bankrate.com/calculators/mor ... lator.aspx and it indicated that an ARM could be interest only.

People who have taken this loan: Did you ever see an amortization table?

Any pointers will be helpful.
Most of the lenders who survived the crash of the real estate market and the economy no longer offer gimmicky mortgages like interest-only, variable payments, and balloon mortgages, so it would not likely be an I-O loan.

In this case you can also tell that it’s an amortized mortgage from their example at https://www.penfed.org/55-Adjustable-Rate-Mortgage/ which is for a $400K mortgage balance. The payment for an amortized loan for $400,000 at 3.% for 360 months is $1686.42 for P&I. which is what they show.

After 60 months of that payment, the balance would be $355,625.45. When the rate adjusts after 60 months, the payment is recalculated to amortize (pay off) the mortgage at the new rate in the remaining number of months as though the rate would stay the same. As they show, for the new rate of 3.625% the payment for $355,625 for 300 months is $1804.27 per month.

Incidentally, when I looked at their example earlier today the starting rate in their example was 2.875%, not the 3% that it shows now.

--more to think about--

On virtually all normal mortgages the interest accrues on the unpaid balance at 1/12 of the yearly rate per month. The interest is paid first, and the remaining portion of the payment is applied to reduce the unpaid balance. The unpaid balance goes down every month, so the ratio of principal and interest changes every month in a geometric progression just the opposite of compound interest in an investment.

(In fact the borrower’s debt is the lender’s investment in an annuity with interest compounded monthly on the unpaid balance. The only difference in the formulas for the calculations is whether you’re the borrower or lender/investor.)

If it were an interest-only loan, the starting payment would be just that -- the interest for the month. For a $400,000 balance the interest -- which is the payment-- would be 400000 x 3.% / 12 = $1000.00.

An “amortized” payment is calculated so that for a fixed monthly payment it has enough principal in each payment to pay all of the principal plus all of the accrued interest in exactly the number of payments agreed upon, as the unpaid balance goes down.

For an IO loan, during the “interest only” period you would not be reducing the unpaid balance. So after the first few years, at the point when the payment had to start amortizing to pay down the principal in the remaining number of years, the payment would have to be considerably higher even if the rate were the same. Since most interest-only mortgages were also adjustable rates, the rate might be considerably higher and cause a huge increase in the payment. ( In fact those kind of gimmicks were a contributing factor to a lot of people being unable to afford their homes when they had to start making amortized payments, and IMO were a contributing factor to the crash of the real estate market and the demise of a lot of mortgage lenders and the PMI insurance companies.)

You aren't locked into "interest only" anyway

Even if you have an interest-only loan, you can make it into a "amortized" loan merely by paying some extra principal along with the interest-only payment. You can determine the monthly payment required by looking up or calculating the payment for an amortized loan for your rate and balance for the number of months/years you want to take to pay off the loan.

...And "ARMs" can be a good idea if used intelligently.

IMO it's a bad idea to take out an ARM loan if the initial low rate is the only way you can afford or qualify for the loan. Since mortgage rates are at at all-time low for most of our lifetimes, the rates are most likely going to go back up. But while a typical ARM mortgage has potential to go to a considerably higher rate and payment, remember that mortgages are compound interest in reverse.

So when the rate adjustment has reasonable caps and does not adjust too often, and when you're only going to live in the home for perhaps 5 to 15 years, an astute borrower can take advantage of the lower rate by paying more than the minimum payment on the principal while the rate and payment are lower, and can often end up paying less total interest and building more equity by the time they sell than they would on a fixed rate loan.

If you want to post the amount you're considering borrowing and how long you expect to live in the home, we can work up an example to think about.

jimb
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runner9
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Re: PenFed 5/5 ARM: Is it fully ammortizing, or interest onl

Post by runner9 »

We did a refi to a PenFed 5/5ARM in August, 2012 and I'm almost positive it had a 30 year schedule included in the paperwork. Of course we are planning to pay it off in under 5 years so we pay way more than the $350.53 it shows due each month. Actually, when we closed in late August they said no payment was due until Nov. 1 but I got them to let us make a large Oct. 1 payment. So, each month we pay on the 1st but the website shows --- due, which I believe is because we're really a month ahead.
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