| What
features to compare with different
Option ARM loans?
 Loan
Term
Option
ARM loans are available for 30 or
15 years. *
Initial
Interest Rate
Your
Minimum Payment Rate or 'Start Rate'.
It may vary from 1.25% up to 3.95%
and depends on your Loan-to-Value
Ratio (LTV).
Initial
Interest Rate Period (Introductory
Period)
With
1-month option ARMs, the initial
interest rate holds only for the
first month, thereafter the interest
rate may change monthly.
During
the introductory period:
After
the introductory period:
|
Periodic adjustments after the introductory
period:
Event |
Loan
Feature |
Change
Frequency |
Cap |
Monthly
Interest Rate Adjustment |
|
Monthly |
|
Annual
Minimum Payment Change |
|
Annually |
|
|
|
Every
5th Year |
None |
Other
adjustments:
Event |
Loan
Feature |
Change
Frequency |
Cap |
|
|
|
None |
Fully
Indexed Rate (FIR)
The
sum of the margin and the most recent
index figure available prior to
a scheduled interest rate change
date. Subject to the interest rate
caps.
Interest
Rate Adjustment Period
The
time between interest rate adjustment
dates.
With
option ARMs, the adjustment period
is usually set to 1 month: the fully
indexed rate may not change more
than once every month based on the
movement of the index.
Maximum
Rate
See: Lifetime
Cap.
Lifetime
Cap
A
lifetime cap limits the interest
rate increase over the life of the
loan. It protects you financially
and usually is expressed as maximum
rate. Lifetime caps may vary from
9%-10% up to 19%.
Lifetime
Floor
See: Margin.
Minimum
Payment
Initially
(for the first 12 months), the minimum
payment is calculated using the
start rate, the amount you borrow
and the loan term. Thereafter, it
is recalculated annually.
Example:
Loan Amount: $200,000.00
Initial Rate: 1.25%
Index: 4.282 (MTA as of May 2006)
Margin: 2.75%
Payment Cap: 7.5%
Fully Indexed Rate: 7.032% ( = index
+ margin )
Minimum
Payment Changes: |
| Year
1 |
$666.50 |
=
Base of Minimum Payment |
| Year
2 |
$716.49 |
=
$666.50 + 7.50% |
| Year
3 |
$770.22 |
=
$716.49 + 7.50% |
| Year
4 |
$827.99 |
=
$770.22 + 7.50% |
| Year
5 |
$890.09 |
=
$827.99 + 7.50% |
|
Minimum
Payment Adjustment Period
The
minimum payment adjustment period
is usually set to 12 months, unless negative
amortization limit is reached.
Minimum
Payment Change Cap
A
limit on how much the minimum monthly
payment can change at each adjustment.
With most option ARMs, your payment
cap will be 7.5% of minimum payment
amount in first five years. It means
that on any Payment Change Date,
the minimum payment cannot increase
or decrease by more than 7.50% (unless
the loan is recast or the negative
amortization limit is reached).
Negative
Amortization Cap (Also
known as: Balance Cap, Negative
Amortization Limit, Negative Amortization
Ceiling)
It
limits the loss of equity in your
home when low monthly payments do
not cover fully the interest rate
charges agreed upon in the mortgage
contract and is usually set to 110%
- 125% of your original principal
balance. When the negative amortization
limit is reached, the minimum
payment increases immediately:
the payment required to fully amortize
the loan over the remaining term
becomes the new minimum payment,
and the payment
cap does not apply.
Payment
Recast Period
Recasting
(or re-calculating your loan) is
another way of limiting negative
amortization and keeping your loan
on the original schedule. Option
ARM loans are recast every five
years (or sooner, if the negative
amortization limit is reached).
This re-calculation is based on
the outstanding principal balance,
the remaining term and the fully
indexed rate. When the loan
is recast, the payment required
to fully amortize the loan over
the remaining term becomes the new
minimum payment, and the payment
cap does not apply (the payment
cup, however, will go back into
effect immediately after the recast,
and will hold until the next time
your loan is recast).
Index
Options
Your
interest rate is usually based on
one of the following indexes:
Monthly
Treasury Average (MTA)
Cost
of Savings Index (COSI)
London
InterBank Offered Rate (LIBOR)
11th
District Cost Of Funds Index (COFI)
These indexes change once
a month.
Margin
The
number of percentage points (for
example, 2.75) the lender adds to
the index rate to calculate the
ARM interest rate at each adjustment.
The margin is set in the mortgage
contract, remains fixed for the
term of the loan and is not impacted
by the financial markets and movement
of interest rates.
Caps
Option
ARMs don't have First Interest Change
Cap or Periodic Interest Change
Cap.
They
have:
Lifetime
Cap (or Maximum Rate)
Lifetime
Floor (or Margin)
Payment
Cap (or Minimum Payment Change Cap)
Balance
Cap (or Negative Amortization Limit)
Loan
Program Variations / Options / Special
Features
Initial
Fixed Rate Period
An
option ARM loan may have an initial
fixed rate / fixed minimum payment
period of 3 or 5 years between the
time the loan is originated and
the first interest rate change date.
After the initial period the loan
converts to monthly adjustable Option
ARM (the interest rate adjusts every
month and you will have payment
options).
40-Year
Term
Some
option ARM loans, for a fee (or
for an increase in your rate), contain
a provision permitting you to increase
the term of the loan from 30 to
40 years.
Bi-Weekly
Payments
Some
lenders offer optional bi-weekly
payment plans with option ARMs.
With bi-weekly mortgage plan you
pay half of the monthly mortgage
payment every 2 weeks. It allows
you to repay a loan much faster.
For example, a 30 year loan can
be paid off within 18 to 19 years.
Conversion
Option
The
interest rate or points may be somewhat
higher for a convertible option
ARM, and it also may require a small
fee at the time of conversion.
Fully Indexed Rate: 7.032% ( = index
+ margin )
Minimum
Payment: $666.50 ( Deferred Interest:
$505.50 )
Interest
Only Payment: $1,172.00
Fully
Amortizing 30-Year Payment: $1,334.91
Fully
Amortizing 15-Year Payment: $1,801.24
Fully
Amortizing 40-Year Payment: $1,247.51
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