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HOW CAN I REDUCE MY RISK? (continued)
Interest-Rate Caps (continued)
In general, the rate on your loan can go up at any scheduled
adjustment date when the index plus the margin is higher than the rate
you are paying before that adjustment. The next example shows how a 5%
overall rate cap would affect your loan.
ARM Interest Rate Monthly Payment
------------------ ---------------
First year @ 10% $570.42
10th year @ 15% (with cap) $813.00
Let's say that the index rate increases 1% in each of the first ten
years. With a 5% overall cap, your payment would never exceed
$813.00--compared to the $1,008.64 that it would have reached in the
tenth year based on a 19% indexed rate.
Payment Caps
Some ARMs include payment caps, which limit your monthly payment
increase at the time of each adjustment, usually to a percentage of the
previous payment. In other words, with a 7.5% payment cap, a payment of
$100 could increase to no more than $107.50 in the first adjustment
period, and to no more than $115.56 in the second. Let's assume that your
rate changes in the first year by 2
percentage points, but your payments can increase by no more than 7.5% in
any one year. Here's what your payments would look like:
ARM Interest Rate Monthly Payment
------------------ ---------------
First year @ 10% $570.42
2nd year @ 12% (without cap) $667.30
2nd year @ 12% (with 7.5% payment cap) $613.20
Difference in monthly payment = $54.10
Many ARMs with payment caps do not have periodic interest rate
caps.
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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