A “conventional loan” is any kind of lender agreement that’s not backed in full by the Veterans Administration or protected by the FHA (the Federal Housing Administration). There are several broad categories of conventional loans. The most common are fixed rate loans, adjustable rate loans, and a hybrid loan that combines both a fixed rate feature with an adjustable rate loan.
With a fixed rate mortgage, a home borrower “locks in” at the stated interest rate for the entire term of the loan, and he or she pays down the principal and interest on the mortgage every month at that rate.
An adjustable rate mortgage loan has a variable rate that changes periodically to reflect changes in market conditions. Some ARMs change the rate every month, others may change the rate once a year.
A hybrid adjustable rate mortgage has an initial period where the rate stays fixed. When the fixed rate period expires, the interest rate adjusts in accordance with market conditions every month (or year) until the loan is paid off. A common ARM offering is a 3-year ARM, which has a fixed rate for the first three years of the 30 year loan term, then an adjustable rate for the remaining 27 years.
A feature of some adjustable rate loans is a minimum payment feature whereby the homeowner might be required to only make a minimum payment each month for a fixed period of time. The monthly minimum payment might not be enough to pay the interest that is actually charged on the loan. The difference is added to the loan balance. Because the loan balance is increasing every month with the minimum payment, the loan is said to be negatively amortizing.
At the end of the minimum payment period, the loan is recast as a fully amortizing loan for the remainder of the loan term. If the homeowner in your example had one of the ARMs with a minimum payment feature for the first two years, it would be very easy for their monthly payment to increase significantly when the loan is recast as a fully amortizing loan at the higher loan balance.
The closing documents will tell you whether the loan is a 30-year fixed rate loan or an adjustable. Look for an adjustable rate rider in the loan documents and look for the payment options. The homeowner could also call the lender’s customer service representative and ask what loan type he has and what the loan features are.
Try accessing the homeowner’s loan information again at the lender’s website. You might have gotten the message you did if the database was offline for maintenance or updating. Or, you might have made a typo when entering the borrower’s loan or personal identifying information. If you still have trouble, have the homeowner call the lender and ask the questions you want answered. If the homeowner does not understand why the payment has increased, the lender’s customer service rep should be able to explain it. You don’t need to give any other reason when you call.
By the way, it might he helpful to know if the loan has a pre-payment penalty.