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Unformatted text preview: adjustment or change date and states the maximum interest rate the borrower will pay. Section 1 is identical to the fixed–rate note. It states that the borrower promises to pay to the lender an amount with interest. Section 2 states that the interest will be charged on the unpaid balance and at a yearly rate of _____ percent, as well as stating that the interest rate will change in accordance with Section 4 of the note. Dynasty School (www.dynastySchool.com) 9-15 REAL ESTATE FINANCE
Section 3 is divided into three subsections. Subsection A, Time and Place of Payments, is identical to the California fixed–rate note. Subsections B and C are unique to this note. Subsection B, Amount of My Initial Monthly Payments, will state the payment in dollars. Because this is an adjust–able–rate note and is adjusted every year, Subsection C states that the interest rate and payment will change. In Subsection A of Section 4, Interest Rate and Monthly Payment Changes, the change date is established for the first change and as the subsection states, the interest rate will change on that day every year thereafter. Subsection B establishes the interest–rate index that will be used. For the note and all of the Fannie Mae/FHLMC California adjustable–rate notes, the index will be either the 1–, 3–, or 5–year Treasury securities. Because this note will be adjusted annually, the 1–year Treasury security will be used as the index for this note. As you will notice, the note is Specific. The index will be the weekly average yield of the 1–year Treasury security. As we learned in our study of the ARM disclosures, the lender must identify what will be used as the current index. This information is also contained in this subsection. In subsection C, Calculation of Changes, you will note that the lender will calculate the new interest rate by adding a certain spread or margin to the current index. In addition, this subsection allows the lender to round the interest rate to th...
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- Spring '10