Adjustable rate mortgages (ARMS)

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More commonly you will see adjustments represented as 2 numbers in arrow such as "2/6" what does each number mean?

2= periodic adjustment cap/6= the life cap

ARM adjustments are sometimes represented as 3 numbers in arrow such as "5/2/6" what does each number mean

5= the intitial adjustment or the first adjustment/2= the periodic adjustment cap/6= the life cap

Convertible ARM

Allows an adjustable rate mortgage to be switched to a fixed rate mortgage without the need of a Refinance

Payment option ARM

Allows the borrower to choose between several payment options each month

The index/cost of money

An economic measurement that is used to make periodic interest adjustments

Index + Margin =

Fully indexed rate, or interest rate

Interest rate cap

How much the interest rate can increase or decrease over the term of a loan, put in to decrease chance of payment shock

ARMS are beneficial to borrowers because_________________ Arms are beneficial to lenders because ___________________

It allows them to qualify more easily for a home loan or for a more expensive loan, This is due to the fact that the interest on an ARM is usually a lot lower at the start of a loan than a fixed rate mortgage loan It frees lenders from being locked into a fixed interest loan for the entire life of the loan. It helps pass the risk of economic fluctuation onto the borrower

The index will be seen on which 2 documents

Loan estimate and the promissory note

The initial cap

Only applies to the first rate adjustment period

Periodic cap

The amount that the interest rate can go up or down at each adjustment period

Hybrid ARM may show up as 2 numbers such as "7/1" what do these numbers mean?

The first number is how long the rate is fixed for so 7=7 years fixed The second number is how often the rate will change so the 1=every 1 year the rate will change in reference to the index

ARM (Adjustable Rate Mortgage) also known as a variable rate loan

The interest rate can change throughout the loan based on the terms of the loan/index or the state of the economy

Introductory Rate/start rate/initial rate

The interest rate on an ARM at closing

Rate adjustment period

The length of time between each change in the interest rate

The margin is disclosed on which documents

The loan estimate or LE

Rate floor

The lowest interest rate to which an ARM may adjust

The lifetime cap/Rate ceiling

The maximum amount that the interest rate can increase over the entire length of the loan, Add the start rate/initial rate to this set "life cap" and that is the maximum that the rate can go up to over the life of the loan

Payment shock

The reason caps are put in place so that the interest costs cannot jump up to extremely high amounts

Teaser rate

When the start rate is lower than the fully indexed rate at the time of closing

The margin is a __________________ that does not change throughout the term of the loan`

fixed number

5 components of an ARM

index margin rate adjustment period interest rate cap and floor conversion options

Hybrid ARM

initial period of fixed interest, then changes at a predetermined date to an adjustable rate mortgage

Types of ARM's

interest only arm payment option arm convertible arm hybrid arm

Why is a payment option ARM good for the borrower

it gives them flexibility to choose the payment that suits their financial situation that month

`The margin represents the lenders _______________ as well as their _________________

operating cost, profit margin

Recasting (payment option ARM)

option arm payments are typically adjusted every 5 years to prevent too much negative amortization

Fully indexed rate

the combination of the index and margin which makes up the actual interest rate

Margin/spread

the number that the lender adds to the index to create the interest rate

Interest-Only ARM

within an initial preset period of time the borrower is only paying off the interest(usually 3-10 years) after which the payments will increase because they must start paying off the principal of the loan


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