ARMs & CAPS Flashcards
What is an ARM?
Adjustable Rate Mortgage
What is another name for ARMs?
Variable Rate Mortgage
How is the interest rate for an ARM determined?
It is determined by the Index rate and Margin
Who determines what the Margin is?
The Lender
Who determines what the Index Rate is?
The Financial Marketplace
What does the Initial Cap do?
Sets the maximum the rate can increase or decrease from the note rate on the first adjustment.
What does the Periodic Cap do?
Sets the maximum the rate can increase or decrease at each adjustment after the Initial
What rate is the Periodic Cap based off of?
Previous years fully indexed rate
What does a Lifetime Cap do?
Sets the maximum that the rate can increase or decrease from the original note rate over the entire life of the loan.
While the fully indexed rate can decrease based on the market, it well never go below the margin.
What does the 3 in 3/2/5 mean and how would it affect a note rate of 4.25% with a 2% Margin?
The 3 is the Initial Cap and means on the first adjustment the rate could increase or decrease by 3%.
In this scenario the most it could increase to would be 7.25%, however, the lowest it could decrease to would be 2% because of the 2% Margin set by the lender
What does the 4 in 2/4/5 mean and how would it affect a note rate that has already had its Initial adjustment to 5.5% with a Margin of 1.5%?
The 4 is the Periodic Cap and means after the Initial Cap adjustment, every period(usually annually) there can be a 4% increase or decrease to the rate.
In this scenario the most it could increase to would be 9.5% and the lowest it could decrease to would be 1.5%
What does the 6 in 2/4/6 mean and how would it affect a note rate that has had its Periodic adjustment to 4.75% with a Margin of 2.5%?
The 6 is the Lifetime Cap and means throughout the life of the loan the note rate could never increase or decrease more than the Lifetime Cap + Note rate
In this scenario the most it could increase to would be 10.75% throughout the life of the loan, however, the lowest it could decrease to would be 2.5% because of the 2.5% Margin set by the lender.
What is a Margin?
It is a fixed percentage rate that is added to an indexed rate to determine the fully indexed rate of an adjustable-rate mortgage (ARM).
What is the Index?
It is an instrument that tracks the financial marketplace. If the market moves, so will the index
