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Unformatted text preview: typically limits the total amount one can owe to 125% of the original loan amount. When that point is reached, monthly payments may be set to fully repay the loan over the remaining term, and the payment cap may not apply. A borrower may limit negative amortization by voluntarily increasing the monthly payment. Prepayment – Many ARMs allow the borrower to pay the loan in full or in part without penalty whenever the rate is adjusted. Some agreements may require special fees or penalties in order to pay off the ARM early. Prepayment details are sometimes negotiable. If so, the borrower may want to negotiate for no penalty, or for as low a penalty as possible. Conversion – If a buyer gets an ARM and the financial circumstances change, the borrower may decide not to risk any further changes in the interest rate and payment amount. The agreement with the lender can have a clause that lets the borrower convert the ARM to a fixed–rate mortgage at designated times. The converted rate is generally set at the current market rate for fixed–rate mortgages. In exchange for this flexibility, the interest rate or up–front fees may be higher for a convertible ARM, and there may be a special fee at the time of conversion. Dynasty School (www.dynastySchool.com) 9-25 REAL ESTATE FINANCE ARM DISCLOSURES (REGULATION Z)
The 1988 Regulation Z amendments are the first disclosures specifically designed for the increasingly popular variable–rate instruments. Before the amendments, only the standard Truth in lending disclosures were made, and they came late in the financing process (when actual costs were fully known) and could not accurately reflect the effects of variable terms. The new disclosures, using a $10,000 model loan example and a historical summary of the index being used, are able to give the borrower a clear picture of how payments and loan balance may be affected by a variable interest rate. The essential features of an ARM are specifically addressed in these disclosures: the index used, how interest rate and payment are determined, frequency of adjustment, caps, and the po...
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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.
- Spring '10