ADJUSTABLE RATE MORTGAGES (ARM'S)

How does an (ARM) benefit the lender

It free's them from being locked into a fixed-interest rate for the entire life of the loan.

Why is an ARM a popular loan

It helps people qualify more easily for a home loan and for more expensive loan. Rates tend to start a little bit lower than a fixed rate mortgage there for the payment is smaller in the beginning.

What are some common "Indices" that you will hear about?

1. (CMT) The Constant Maturity Treasury 2. (COFI) Cost of Funds Index 3. (LIBOR) London Inter Bank Offering Rates 4. (CODI) Certificate of Deposit Index 5. (PRIME RATE) The Bank Prime Loan Rate

What are the different components of an ARM?

1. INDEX 2. MARGIN 3. RATE ADJUSTMENT PERIOD 4. INTEREST RATE CAP/FLOOR (if any) - what's the highest and what's the lowest it can go. 5. CONVERSION OPTIONS (if any) - can it convert at some point from an adjustable to a fixed rate?

What is the INDEX when referring to ARM?

1. INDEX - and economic measurement that is used to make periodic interest adjustments for an adjustable rate mortgage. - the lender can decide what index is used, but they have no control over the measurement of the index at any given time (if it goes up or down) that's out of their control. - the Index is referred to as the cost of money (COMI) - The FULLY INDEXED RATE - is a combination of the INDEX and the MARGIN see the right - the plural of INDEX is "INDICES" NOT INDEXES. - The Index must show to a potential borrower on the "Loan estimate" and on the "Promissory Note" when the loan closes

What IS and ARM?

Also referred to as a "variable rate loan" - it's based on the current INDEX - the interest rate only change is if the "chosen index" changes - the borrowers payments may stay the same for a specified time (for example one or two years) depending on the borrowers agreement with the lender

What is an "OPTION" ARM

It allows the borrower to choose among several payment options each month - this provides flexibility for borrowers by allowing them to choose the payment that suits their current financial situation - option ARM'S offer a variety of payment options, such as a minimum payment (which can lead to negative amortization), a 15-year or 30-year amortized payment, for an interest-only payment

What is a "HYBRID LOAN" ARM

It combines the features of a fixed rate loan with those of an adjustable rate loan - it's desirable for borrowers who plan to sell their homes for pay off their loans within a few years - the fixed rate feature gives the borrower some security with fixed payments in the initial term of the loan - the adjustable rate feature is that the initial interest rates on these loans are typically lower then a fixed rate loan (which they plan to pay off early or sell the home anyway) - they usually are a fixed interest rate for 3, 5, 7 or 10 years.

How does an interest rate adjust in an ARM

It is just according to the cost of money (COM index) like what's going on in the economy today

What is an "INTEREST-ONLY" ARM

It's and INTEREST ONLY adjustable rate mortgage. It allows payments of interest only for a specified number of years (typically between 3 and 10 years) - it allows the borrower to have smaller monthly payments for a period of time - after that, monthly payments increase even if interest rate stay the same, Because the borrower must start repaying the principal and the interest each month.

What is the INITIAL CAP on an ARM

It's only the first rate adjustment period and indicates the number of percentage points that the rate me increase over the start rate.

What is an "introductory rate" when referring to a ARM?

It's the interest rate at closing that will be in effect for a certain period of time ranging from one month to 10 years depending on the loan product.

What is a "CONVERTABLE" ARM

It's when the ARM has a conversion option - gives them the opportunity at some point to convert the loan from an adjustable rate mortgage to a fixed rate mortgage

What is the MARGIN when refereeing to ARM?

MARGIN: It's the number the lender adds to the index to determine the actual interest rate of an ARM - it is sometimes called a "spread" - it's actually the profit at the bank makes - the margin is a fixed number that will not change during the term of the loan. - it must be disclosed on the loan estimate

What is the LIFE CAP when referring to an ARM?

The LIFE 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.

What is the PERIODIC CAP on an ARM

The periodic cap Limits the amount the interest rate can adjust up or down from one adjustment to the next. EXAMPLE: If a periodic rate was 5% and the periodic cap is 2%, then the maximum change is 2% up or down. - answer: 3% would be the lowest and 7% would be the highest the lowest you're right

What is a "teaser rate" when referring to an ARM

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