Adjustable rate mortgages (ARMS)
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
