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HOW CAN I REDUCE MY RISK? (continued)
Interest-Rate Caps (continued)
A drop in interest rates does not always lead to a drop in monthly
payments. In fact, with some ARMs that have interest rate caps, your
payment amount may increase even though the index rate has stayed the
same or declined. This may happen after an interest rate cap has been
holding your interest rate down below the sum of the index plus margin.
WITH SOME ARMS, PAYMENTS MAY
INCREASE EVEN IF THE INDEX RATE STAYS THE SAME OR DECLINES
Look below at the example where there was a periodic cap of 2% on
the ARM, and the index went up 3% at the first adjustment. If the index
stays the same in the third year, your rate would go up to 13%.
ARM Interest Rate Monthly Payment
------------------ ---------------
First year @ 10% $570.42
If index rises 3%...
2nd year @ 12% (with 2% cap) $667.30
If the index stays the same for the
3rd year @ 13% $716.56
Even though index stays the same in
3rd year, payment goes up $49.26
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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