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Unformatted text preview: n) is at 10%. But the lender is offering an 8% rate for the first year. with the 8% rate, the first–year monthly payment would be $476.95. Let's see what happens in the second year with the discounted 10% ARM. ARM Interest Rate First year (with discount) 8% 2nd year at 10% Monthly Payment $476.95 $568.82 As the example shows, even if the index rate stays the same, the monthly payment goes up from $476.95 to $568.82 in the second year.
9-12 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 9: FIXED RATE MORTGAGE AND ALTERNATIVE MORTGAGE INSTRUMENTS
Suppose that the index rate increases 2% in one year and the ARM rate rises to a level of 12%. ARM Interest Rate First year (with discount) 8% 2nd year at 12% Monthly Payment $476.95 $665.43 That's an increase of almost $200 in monthly payment. NEGATIVE AMORTIZATION AND ADJUSTABLE RATE MORTGAGES
Negative amortization can arise during times of high inflation. Rapid inflation creates a need to qualify a borrower at a low entry level rate of interest even though the payments will later increase to accommodate full amortization of the loan over a particular term of years. In some cases, the initial monthly payments may be inadequate to cover the interest, let alone provide for any principal reduction. Whatever the amount of the interest shortfall, it is added to the existing principal balance of the loan, and the following month, the process is repeated. Since the interest shortfall is always added to the principal balance existing at the time, the borrower ends up paying interest on interest, and the principal balance grows with compounding effect. Example:
You borrow $100,000 at 9% with payments of $600 per month. The first month's interest should be $100,000 X 9% = $9,000 divided by 12 months = $750 per month to cover the interest. But since you pay only $600, you are short $150 on the interest portion. This $150 is added to the existing loan amount of $100,000,...
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