Stable Mortgage Explained
A Stable Mortgage is an innovative mortgage option that blends both fixed and adjustable interest rates. Originally created by General Electric Capital Mortgage Service, Inc. and FNMA, stable mortgages were developed to offer an alternative to traditional fixed-rate and adjustable-rate mortgages by providing the advantages of both in a single loan instrument.
Key Characteristics
- Fixed and Adjustable Rate Combination: The mortgage interest rate is a blend of a fixed rate and an adjustable rate based on an index.
- Options Provided: Typically, stable mortgages come in two configurations:
- 50/50 Mix: Combines 50% fixed rate and 50% adjustable rate.
- 75/25 Mix: Combines 75% fixed rate and 25% adjustable rate.
- Predictable Payments: Offers greater payment stability compared to fully adjustable-rate mortgages while still allowing room for adjustments.
Example
Consider a stable mortgage originated at an interest rate of 6%. If the relevant index justifies changing the adjustable portion to 7%:
- 50/50 Option: The interest rate would become 6.5%.
- 75/25 Option: The interest rate would become 6.25%.
Frequently Asked Questions (FAQs)
What makes a stable mortgage different from other mortgage types?
A stable mortgage combines the predictability of a fixed-rate mortgage with the flexibility of an adjustable-rate mortgage. This provides the borrower with partial protection against rate increases while potentially benefiting from lower initial rates.
How often is the adjustable portion of a stable mortgage adjusted?
The adjustment period varies based on the terms of the loan, but it typically follows the common adjustable-rate mortgage structures, which can be annually after an initial fixed period.
Who can benefit most from a stable mortgage?
Borrowers who benefit the most are those seeking the security of fixed-rate stability with the potential for the lower initial payments of an adjustable rate. This makes it ideal for individuals who anticipate stable income but want to mitigate the risk of interest rate spikes.
Are there any specific eligibility criteria for stable mortgages?
Eligibility criteria generally align with conventional mortgage standards, including income verification, credit score requirements, and proof of ability to repay the loan.
Related Terms
- Fixed-Rate Mortgage: A loan in which the interest rate remains constant throughout the life of the loan.
- Adjustable-Rate Mortgage (ARM): A loan with an interest rate that changes periodically based on an index.
- Index: A benchmark interest rate that reflects general market conditions, which determines the adjustable portion of a mortgage rate.
- Amortization: The process of paying off a debt over time through regular payments of principal and interest.
Online Resources
- Fannie Mae: Understanding Residual Market Mortgage Products
- Consumer Financial Protection Bureau: Different Types of Mortgages
- National Association of Realtors: Mortgage Basics
References
- “Glossary of Real Estate Terms”, General Electric Capital Mortgage Service, Inc.
- “Mortgage Loan Instruments”, FNMA Publications
- Consumer Financial Protection Bureau (CFPB)
Suggested Books for Further Studies
- “The Mortgage Encyclopedia” by Jack Guttentag
- “Mortgage Loan Brokering” by David Lawrenson
- “Investing in Real Estate” by Gary W. Eldred
- “Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
Real Estate Basics: Stable Mortgage Fundamentals Quiz
### What is a unique characteristic of a stable mortgage compared to traditional fixed or adjustable-rate mortgages?
- [ ] It has a balloon payment at the end.
- [ ] It is only offered to first-time borrowers.
- [ ] It combines fixed and adjustable-rate interest rates.
- [x] It cannot be refinanced.
> **Explanation:** A unique characteristic of a stable mortgage is that it combines fixed and adjustable-rate interest rates in the same loan, offering both stability and flexibility.
### In a 75/25 stable mortgage, what percentage of the interest rate is fixed?
- [ ] 25%
- [x] 75%
- [ ] 50%
- [ ] 100%
> **Explanation:** In a 75/25 stable mortgage, 75% of the interest rate is fixed, and the remaining 25% is adjustable based on an index.
### How frequently can the adjustable portion of a stable mortgage be updated?
- [ ] Never; it stays constant.
- [ ] Monthly
- [ ] Quarterly
- [x] Annually
> **Explanation:** Typically, the adjustable portion of a stable mortgage can be updated annually after an initial fixed-rate period.
### For what type of borrowers is a stable mortgage particularly beneficial?
- [ ] Those expecting uncertain future income
- [x] Those seeking interest rate stability with some flexibility
- [ ] Those who experience frequent changes in income
- [ ] Only business owners
> **Explanation:** Stable mortgages are particularly beneficial for those seeking the stability of a fixed-rate mortgage combined with the flexibility of adjustable rates.
### On what basis is the adjustable rate of a stable mortgage derived?
- [ ] Predetermined by the lender
- [ ] National average house price
- [ ] The borrower's credit score
- [x] An index such as LIBOR
> **Explanation:** The adjustable rate of a stable mortgage is derived from an index such as the LIBOR, which reflects broader market conditions.
### What is the main benefit of the fixed portion of a stable mortgage?
- [x] Predictable monthly payments
- [ ] Lower closing costs
- [ ] No credit check required
- [ ] Government subsidy
> **Explanation:** The main benefit of the fixed portion of a stable mortgage is predictable monthly payments that offer stability over the life of the loan.
### In the context of a stable mortgage, what does the "index" refer to?
- [ ] The amount of loan principal
- [ ] Mortgage insurance rate
- [x] A benchmark interest rate that affects adjustable rates
- [ ] A portion of the down payment
> **Explanation:** The "index" in the context of a stable mortgage refers to a benchmark interest rate that affects the adjustable portion of the mortgage rates.
### How does a stable mortgage's 50/50 option adjust if the index rate changes to 7% when originally set at 6%?
- [x] It adjusts to 6.5%
- [ ] It remains at 6%
- [ ] It adjusts to 7%
- [ ] It adjusts to 6.75%
> **Explanation:** For a 50/50 stable mortgage initially set at 6%, if the index rate changes to 7%, the mortgage rate would adjust to 6.5%.
### What should be the primary consideration for opting a stable mortgage?
- [ ] Down payment requirement
- [ ] Length of the mortgage
- [x] Balance between rate stability and flexibility
- [ ] The type of property
> **Explanation:** The primary consideration for opting for a stable mortgage should be finding the right balance between rate stability and flexibility.
### In which sector’s properties is the use of a stable mortgage particularly popular?
- [ ] Agricultural
- [ ] Commercial real estate
- [x] Residential real estate
- [ ] Industrial real estate
> **Explanation:** The use of a stable mortgage is particularly popular in residential real estate due to its benefits in managing homeownership expenses.
