real estate finance - full book (500 pgs)

# Some agreements may require special fees or penalties

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: GAGE INSTRUMENTS In this example there is a periodic cap of 2% on the ARM, and the index went up 3% at the first adjustment. If the index stays the same in the third year, the rate will go up to 13%, making up the 1% not added the previous year. ARM Interest Rate First year at 10% If index rises 3%, 2nd year at 12% (with 2% rate cap) If the index stays the same, 3rd year at 13% Monthly Payment \$570.42 \$667.30 \$716.56 Even though index stays the same, payment goes up \$49.26 In general, the rate on the loan can go up at any scheduled adjustment when the index plus the margin is higher than the rate before that adjustment. Overall Cap – An ARM may also have an overall interest rate cap. The next example shows the effects of a 5% overall rate cap. Suppose the index rate increases 1% in each of the first ten years: Example: Overall Cap ARM Interest Rate First year at 10% 10th year at 19% (without a cap) 10th year at 14% (with a cap) Monthly Payment \$570.42 \$1,008.64 \$764.08 with a 5% overall rate cap, the monthly payment would never exceed \$764.08, no matter how much rates continue to rise. Payment Caps – Some ARMs include payment caps, which limit the monthly payment increase at the time of each adjustment, usually to a percentage of the previous payment. In other words, with a 7+% 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. Example: Payment Caps Dynasty School (www.dynastySchool.com) 9-23 REAL ESTATE FINANCE Assume that the rate changes in the first year by 2 percentage points, but payments can increase by no more than 7½% in any one year. Here is how the monthly payments would be affected: ARM Interest Rate First year at 10% 2nd year at 12% (without payment cap) 2nd year at 12% (with 7½% payment cap) Difference in monthly payment = Monthly Payment \$570.42 \$667.30 \$613.20 \$54.10 Many ARMS with payment caps do not have periodic interest rate caps. NEGATIVE AMORTIZATION Because payment caps limit only payment increases, and not interest rate increases, payments held down by a cap may not cover all of the int...
View Full Document

## 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.

Ask a homework question - tutors are online