real estate finance - full book (500 pgs)

Some agreements may require special fees or penalties

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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...
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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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