ARMS

The most common indices are:

- CMT - Constant Maturity Treasury - 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)

There are several components of an ARM

- Index - Margin - Rate adjustment period - Interest rate cap/floor (if any) - conversion options (option to convert from adjustable to fix at some point)

The longest introductory rate for an ARM is ______

10 years

For a 5/1 ARM, the rate may adjust for ______ years after which the rate may adjust annually until the loan is paid off

5

If the start rate is 3% and the life time cap is 6% the most the interest rate can ever be is ___%

9

Lifetime Cap

A limit to the amount that interest rate can increase over the entire term of the loan.

Interest Rate Cap

A limitation on the amount that an interest rate may increase OR decrease either at the adjustment date or over the lifetime of the loan.

Payment Shock

A significant increase in the monthly payment on an ARM that may surprise the borrower.

Payment-Option ARMS

A type of loan that allows the borrowers toi choose among several payment options each month. - Provides flexibility - allows you to chose the payment that suits their current financial situation. - Offers variety of payment options like minimum payment, 15 year, 30 year amortized payment or interest only payment. - Every month, they can pay their minimum

Index + Margin =

Adjustable Interest Rate OR Fully Indexed Rate

ARM

Adjustable Rate Mortgage

Convertible ARMs

Allows a borrower to convert from an ARM to a fixed rate without going through refinancing process. - The ARM would have a conversion option This allows the opportunity for the loan to be turned from an ARM to a fixed mortgage.

Option ARM

Allows borrowers to choose from several options each month in terms of making monthly payments. Common options are: - Minimum payment - Interest only - 30 Year Fixed - 15 Year Fixed

Interest-Only ARMs

Allows payment of interest only for a specified number of years (usually 3-10 years) - This allows borrower to have a smaller monthly payment for a period of time. - After, payments increase even if interest rates stay the same, bc the borrower must start repaying principle and interest each month.

Initial cap

Applies only to the first rate adjustment period and indicates the number of percentage points that a rate may increase over the start rate.

T/F If an ARM has a conversion clause, the borrower can convert their loan to a fixed-rate for free.

F

T/F Introductory rates (teaser or not) are set by the borrower

F

T/F The after an ARM loans introductory rate, the interest rate will adjust periodically. This is done by looking at the borrower's current rate + Periodic cap and the Loan's current index + Margin and then taking the higher of the two (subject to the periodic cap)

F

________ ARMs are often advertised as 3/1, 5/1, 10/1 or a 2/28 or 3/27

Hybrid

The specific index used to determine rate adjustments is located on the __________ _____ when the loan does to closing

Promissory Note

_________ _______ are used with ARMS to limit the number of percentage points an interest rate can be increased during the term of a loan, helping to eliminate large fluctuations in mortgage payments.

Rate caps

T/F A hybrid ARM may be a desirable option for borrowers who plan to sell their homes or pay off their loans within a few years.

T

T/F Federal law does not contain any provision restricting the minimum adjustment period for an ARM

T

T/F Introductory rates (teaser or not) are set by the lender

T

T/F Many lenders like ARMS because they can pass the risk of fluctuation interest rates on to borrowers

T

T/F The after an ARM loans introductory rate, the interest rate will adjust periodically. This is done by looking at the borrower's current rate + Periodic cap and the Loan's current index + Margin and then taking the lower of the two (subject to the periodic cap)

T

T/F The index used to determine rate adjustments can be found on the loan estimate and the promissory note

T

T/F The initial and periodic rate refer to the ability for the rate to move both ways (increase or decrease)

T

T/F The interest rate on the ARM only changes if the chosen index changes

T

T/F The lender chooses the index but does not control the measurement of the index

T

T/F The margin is a fixed number that is NOT subject ton change during the term of the loan

T

T/F The margin may not be the same across all lenders?

T

Fully Indexed Rate

The combination of the index and the margin

Introductory Rate

The interest rate on an ARM at closing that will be in effect for a period of time ranging from one month to 10 years depending on the loan product.

Rate Adjustment Period

The length of time between interest rate changes on ARMS

More commonly, ARMs are shown with 2 numbers _A_/_B_ B represents ________

The lifetime interest rate cap. The maximum amount the interest rate can increase during the life of the loan

More commonly, ARMs are shown with 2 numbers _A_/_B_ A represents ________

The period adjustment cap Maximum amount the interest rate can increase or decrease from one adjustment period to the next

Rate Floor

This put in place to protect the lender and represents the lowest interest rate that an ARM will adjust. For loans sold to Fannie or Freddie, this is usually identical to the margin

An ARM is also referred to as a

Variable Rate Loan

Recasting

When a loan is readjusted and the automatic payment is adjusted. This process amortizes the loan so it can be paid in full by the end of the loan term.

Teaser Rate

When the introductory rate is lower than the fuller indexed rate

Index

an economic measurement used to make periodic interest adjustments for an ARM

For a 5/1 ARM, the rate may adjust for 5 years after which the rate may adjust _________ until the loan is paid off.

annually

The rate cap protects the __________ from payment shock

borrower

______ regulate how much interest rate can increase and decrease over a given period.

caps

A borrower can change from an adjustable to fixed-rate mortgage without refinancing if they have a ____________ ARM

convertible

The index is often referred to as the ______ __ _________

cost of money

Some ARMs are identified with three numbers _A_/_B_/_C_. A represents the ______

first adjustment interest rate cap

The interest an ARM loan varies upward or downward over the term of the loan depending on money market conditions and the agreed upon ________

index

The interest rate on the ARM only changes if the chosen _______ changes

index

The plural for index

indices

The introductory rate is also known as the

initial rate OR start rate

The start rate is also known as the

introductory rate OR initial rate OR note rate

The index is/is not under the control of the lender

is not

The margin is disclosed on the _____ ______

loan estimate

What causes the index to fluctuate ?

market forces

An adjustment cap is also known as a _________ ____

rate cap

The margin is sometimes referred to as the _______

spread

The Note Rate is also known as the ______ rate

start

The introductory rate is also known as the

start date OR initial rate This rate may be fully indexed or a lower rate in place for a specific period of time.

With option ARMs and the implementation of the ________ ___ ________ borrowers must still be qualified for non traditional mortgage products based on their ability to make the monthly payment according to the fully-indexed rate of the loan and schedule that fully amortizes over the loan's term.

Ability to Repay

An interest rate cap is also known as an _______ _____

Adjustment Cap

Adjustable Rate Mortgage (ARM)

An ARM frees lenders from being locked into a fixed-rate for the entire life of the loan. In an ARM, interest rates may adjust, according to the terms in the promissory note, to reflect the current cost of money. ARMs are popular tools because they may help borrowers qualify more easily for a home loan or for a more expensive home

The additional disclosure that is required to be made to the borrower regardless of the length of the adjustment period for the ARM is the

CHARM booklet

Hybrid ARMs

Combines the features of a fixed-rate loan with those of an adjustable- rate loan. - Starts with a normal low payment then converts to fixed - For a hybrid ARM, the fixed rate feature gives borrowers some security with fixed payments in the initial term of the loan.

T/F The index represents the lender's operating costs and profit

F

T/F The lender can control the measurement the index is at any given time.

F

T/F The margin is a fixed number for the fixed period only and then will adjust after the initial adjustment period has ended

F

T/F The margin remains the same across all lenders?

F

The combination of the index and the margin in known as the

Fully Indexed Rate

Periodic Adjustment Cap

Limits the amount the interest rate can adjust up or down from one adjustment period to the next The most it can go up or down at each adjustment period.

Discounted/Teaser Rate

Refers to a lower rate in place for a specific period of time for an ARM.

Periodic Cap

Refers to the amount which a rate can increase or decrease in any one adjustment period

Lifetime cap

Sets a maximum number of percentage points that the rate can increase over the start rate for the LIFE OF THE LOAN functioning as a rate ceiling.

T/F The margin represents the lender's operating costs and profit

T

T/F Typically the adjustable-rate feature on a hybrid ARM is that the initial interest rates on these loans are typically lower than a fixed-rate loan

T

Introductory rates (teaser or not) are set by the _______

lender

The rate floor protects the ________ from not turning a profit on an ARM

lender

Who choses which index will be tied to the loan?

lender

Some ARMs are identified with three numbers _A_/_B_/_C_. C represents the ______

lifetime interest rate cap

The specific index used to determine the rate adjustments must be disclosed to a potential borrower on the ________

loan estimate

The shortest introductory rate for and ARM is _______

one month

Interest rate caps for ARMs help avoid ________ _______

payment shock

The intial rate is also known as the

start rate OR introductory rate

When the introductory rate is lower than the fully indexed rate at the time of closing it is known as a _______ rate

teaser

Margin

the number that the lender ADDs to the index to determine the interest rate of an ARM

Some ARMs are identified with three numbers _A_/_B_/_C_. B represents the ______

the period adjustment cap