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HOW ARMS WORK:THE BASIC FEATURES (continued)
The Margin
To determine the interest rate on an ARM, lenders add to the index
rate a few percentage points called the "margin." The amount of the
margin can differ from one lender to another, but it is usually constant
over the life of the loan.
Index + Margin = ARM interest rate
Let's say, for example, that you are comparing ARMs offered by two
different lenders. Both ARMs are for 30 years and an amount of $65,000.
(All the examples used in this booklet are based on this amount for a
30-year term. Note that the payment amounts shown here do not include
items like taxes or insurance.)
Both lenders use the one-year Treasury index. But the first lender
uses a 2% margin, and the second lender uses a 3% margin. Here is how
that difference in margin would affect your initial monthly payment.
In comparing ARMs, look at both the index and margin for each plan.
Some indexes have higher average values, but they are usually used with
lower margins. Be sure to discuss the margin with your lender.
Home sale price: $85,000
Less down payment: -20,000
Mortgage amount: $65,000
Mortgage term: 30 years
First Lender
One-year index = 8%
Margin = 2%
ARM interest rate = 10%
Monthly payment @ 10% = $570.42
Second Lender
One-year index = 8%
Margin = 3%
ARM interest rate = 11%
Monthly payment @ 11% = $619.01
The above text was extractly directly from the Consumer
Handbook On Adjustable Rate Mortgages, as published by the
Federal Reserve Board and Office of Thrift Supervision. Although the above
text is public domain, this electronic booklet is copyrighted © 1996
by Mortgage Market Information Services, Inc. Readers of this electronic
booklet are allowed to print the booklet for non-profit distribution
Pg 1 -- Introduction and credits
Pg 2 -- PEOPLE ARE ASKING
Pg 3 -- PEOPLE ARE ASKING (continued)
Pg 4 -- WHAT IS AN ARM?
Pg 5 -- HOW ARMS WORK:THE BASIC FEATURES
Pg 6 -- FEATURES (continued)
Pg 7 -- CONSUMER CAUTIONS (Discounts)
Pg 8 -- CONSUMER CAUTIONS (Payment shock)
Pg 9 -- HOW CAN I REDUCE MY RISK?
Pg 10 -- REDUCE MY RISK (continued)
Pg 11 -- REDUCE MY RISK (continued)
Pg 12 -- REDUCE MY RISK (continued)
Pg 13 -- REDUCE MY RISK (continued)
Pg 14 -- WHERE TO GET INFORMATION
Pg 15 -- INFORMATION (continued)
Pg 16 -- GLOSSARY
Pg 17 -- GLOSSARY (continued)
Pg 18 -- MORTGAGE CHECKLIST
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