real estate finance - full book (500 pgs)

95 56882 as the example shows even if the index rate

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Unformatted text preview: margin are important. Some indexes have higher average values, but they are usually used with lower margins. ADJUSTMENT PERIOD At the present time, with most ARMs, the interest rate and monthly payment change every 6 months. However, some ARMs have different interest and payment changes, and borrower and lender may agree upon any period they choose. The period between one rate change and the next is called the adjustment period. A loan with an adjustment period of 6 months is called a 6–month ARM, and the interest rate can change once every six months. Borrowers must be notified at least 30 days prior to a change. After notification, the borrower usually has a 90–day right to pay off the loan without penalty–referred to as the “window period.” 9-10 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 9: FIXED RATE MORTGAGE AND ALTERNATIVE MORTGAGE INSTRUMENTS PAYMENT CAPS To avoid what is known as “payment shock,” most ARMs have interest rate caps–a ceiling on annual and total interest rate increases. A maximum of a 2% per year increase is typical with a 5 to 6% total increase allowed over the initial contract rate. For example, if an ARM starts out at 4%, the maximum increase in any one year might be 2%, with a lifetime maximum of 6% (or a high of 10% for the life of the loan). ARMs must also show the “floor,” the lowest rate to which the loan may go, in addition to the ceiling. Sometimes floor rates can go as far down as up. Example: Index and Margin Suppose one is comparing ARMs offered by two different lenders. Both ARMs are for 30 years, and the loan amount is $65,000. (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 the initial monthly payment. Mortgage amount $65,000 First lender One–year index 8% Margin =2% ARM i...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.

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