Adjustable rate mortgage
If an ARM has an interest rate of 5.5 with a 6% lifetime cap. that means the interest rate can never exceed... and why?
11.5%, because if the lifetime cap is at 6% and the initial rate is 5.5, the lifetime can only go up 6 from the starting rate, making it 11.5%
Hybrid ARMs have...
2 components
Rate caps are commonly shown with:
2 numbers
ARMS are usually identified with what ?
3 numbers
If the Rate in the first period is 6% and the Periodic cap is 3%, then the maximum and lowest the rates could be is... and why?
3% and 9% because the periodic cap is 3%
Joe is borrowing 280,000 for a home, he gets a 3-1 ARM with a start rate of 5.625, a periodic cap at 2% and lifetime rate cap at 6%, What does it mean? And what is the highest he could be charged in his 5th year? And show work
3-1 means it's fixed for 3 Years and adjustable 1 year It can only go up or down by 2% in each period The most that could be charged is 9.625 The life cap is 11.625, so the rate has to stay at or under 11.625 Cause its the limit, Since it's a 3-1 , 3 years are fixed, so the rate will one begin to raise years 4&5 making: 5.265+2= 7.265(4), 7.265+2=9.265 (5), year 5 the highest the rate could go is 9.265
6/7/4 is an example of what? And what does it mean?
6% interest rate 7% period adjustment cap 4% lifetime interest cap
If the index is 4.25 + 2.00% margin what will the fully index rate be?
6.25 fully indexed rate
A convertible ARM allows...
A borrower to convert from ARM to fixed rate without refinancing
Option ARMs offer...
A variety of payment options,
Option ARM....
Allows a borrower to code among several payment options each month
the rate cap was created to avoid..
Borrowers from having payment shock because the rates suddenly have a significant increase
Interest only loans allows...
Borrowers to have smaller monthly payments
They most common indices are:
Constant maturity treasury (CMT) The 11th district cost of fund index (COFI) The London inter bank offering rates (LIBOR) Certificate of deposit index (CODI) The bank prime loan rate (Prime Rate)
Convertible ARM may have a ...
Conversion option
Hybrid loans combine...
Features of a fixed rate loan with the ARM loan
Option ARM provides...
Flexibility for the borrower
For loans with Freddie and Fannie , the floor is usually...
Identical to the margin
What are the components of an arm?
Index Margin Rate adjustment Interest rate cap/floor Conversion options
The plural for index is..
Indices
What's the benefits of having a ARM?
It fees lenders from being locked into a fixed rate interest for the entire life of the loan Interest may be lowers sometimes as well as higher
Recasting exists because...
Option ARM payments are adjusted every 5 years
Minimum payments, 15 year or 30 year amortized payment are examples of choices available in...
Option ARMs
A rate cap protects the borrower, but a rate floor...
Protects the lender
The introductory rate is the rate that the borrower...
Starts at
The interest on the loan can vary upward or downward, depending on...
The agreed index
A conversion option allows..
The borrower to have a convertible ARM
The interest rate on thev ARM only changes if...
The chosen index changes
The fully index rate is...
The combination of the index and the margin
The index is also called...
The cost of money
The 2 numbers in a rate cap mean:
The first number indicates the maximum the meat can raise or decrease The second number indicates the amount the interest rate can increase during the loan
What does the 3 numbers represent?
The first number is the interest cap The second number is the period adjustment cap The third number is the lifetime interest rate cap
When a hybrid loan is shown numerically (?-?) What does it mean?
The first number means how long it's fixed for The second number shows how long it's adjustable
The index + the margin=
The fully indexed rate
The margin represents...
The lenders operating costs and profit margin
The margin must be disclosed in...
The loan estimate
The specific index must be disclosed to the borrower on...
The loan estimate Promissory note on closing
For a hybrid loan, 3-5 means
The loan is fixed for 3 Years and Adjustable for 5
Rate floor is ...
The lowest an interest rate can go
If the lender doesn't control the index, Who controls the index?
The market conditions
ARM has a start rate of 6% with a 3/7 cap , what's the highest and lowest the rate can change in one period? What is the most it can ever increase Over the whole loan?
The most it can increase is 9%(3+6) The lowest is 3%(6-3) The most it can increase 13% (7+6)
The Life cap is...
The most the rate can go over the life of the loan, the ceiling of the loan over the start rate
The margin is.....
The number added to the index to determine the interest rate of the ARM
The margin is the one... in an ARM
The only fixed number
The index...
The part on the mortgage that determines if it goes up or down
The margin is the.... to the bank
The profit the bank/lender makes
Seeing a 2/6 is an example of?
The rate cap 2% is the most the interest rate can increase in one adjustment period 6% is the most the interest rate can increase during the life of the loan
Introductory Rate is...
The rate on an ARM at closing
A margin is also called...
The spread
What is another name for the adjustable rate mortgage?
The variable rate loan
Interest only ARM is...
When the borrower is allowed to only pay interest for a specified number of years (typically 3-10 years)
A rate cap is...
a limit on the amount an interest rate can raise or lower either on the date or the life on the loan
the introductory rate is also called...
start rate or initial rate
The inital cap is...
the cap that applies during the first rate adjustment period
the periodic cap is....
the cap that limits the amount the interest rate can go up and down from one adjustment to the next
what are the 3 interest caps?
the inital cap Periodic adjustment cap lifetime caps
The rate Adjustment period is...
the length of time between Interest rate changes on ARMS
when the introductory rate is lower then the fully indexed rate at closing then its called...
the teaser rate
Negative amortization is...
when the principal on a loan is higher then the amount of interest on the loan