Adjustable-Rate Mortgages Flashcards
What is the index rate?
The index rate is the measure of interest rates based on a specific index. Commonly-used examples include the London Interbank Offered Rate Index (LIBOR), Cost of Funds Index (COFI), and One-Year Constant Maturity Treasury Rate. The index rate may change during the course of the loan and thus affect the borrower’s payment amount.
What is the margin?
The margin is set by the lender and represents the lender’s costs in making the loan. It is expressed as a percentage and does not change over the life of the loan.
What is the fully-indexed rate?
The fully-indexed rate is the lender’s margin plus the index.
What is the start rate?
The start rate, or initial interest rate, may be the fully-indexed rate or a lower rate in place for a specific period of time (often called a discounted rate, introductory rate, or teaser rate).
What is the adjustment period?
The adjustment period is the period of time between rate changes on an ARM.
What is a periodic cap?
A periodic cap refers to the amount by which a rate can increase or decrease in any one adjustment period.
What is is a life time cap?
A lifetime cap limits the amount by which the interest rate can increase over the entire term of the loan.
What are some common examples of caps?
- 2 / 6: The periodic cap is 2%. The lifetime cap is 6%. In other words, at any one adjustment, the rate may not increase or decrease by more than 2% from the current rate, and over the term of the loan, it may not increase or decrease by more than 6% from the original start rate.
- 1 / 5: The periodic cap is 1%. The lifetime cap is 5%.
- 3 / 2 / 5: On a 3/2/5, after an introductory fixed-rate period, the first rate adjustment is limited to a 3% increase above the start rate, with each subsequent adjustment capped at 2%. The loan has a lifetime cap of 5%.
What are Hybrid arms?
Hybrid ARMS have interest rates that are fixed for an initial period of time, after which the rates begin adjusting. For example, a 3 / 1 ARM has a fixed rate for three years and then adjusts every year thereafter. Other popular hybrid ARMS include the 5 / 1 and the 7 / 1.
What are Option arms?
Option ARMs derive their name from the provision allowing the borrower to choose from several options each month in terms of making the monthly payment.
What is a Minimum payment arm?
This is calculated by amortizing the principal balance over 30 years at the start rate, which is usually very low (for example, 1%). This payment cannot increase by more than 7.5% each year for the first five years.
What is an interest only arm?
For a set period of time, the borrower may pay only the interest due on the loan each month; the payment amount will then increase as the loan terms will require the borrower to begin payment on the principal owing
What is a 30-year fixed?
The principal balance is amortized over 30 years at the current note rate
What is a 15-year fixed?
The principal balance is amortized over 15 years at the current note rate
What is a balloon loan?
A balloon, or partially-amortized, loan has equal monthly payments required over the term of the loan that do not pay off the loan in its entirety. A balance will be owing at the conclusion of the term (i.e., a balloon payment), which will be due and payable at maturity. The borrower may either pay the balloon payment owing or, if the balloon contains a “conditional refinance feature,” the loan will be converted to a rate which will remain in effect for the remainder of the term.
