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Unformatted text preview: tion. Lower initial rates when compared with fixed rates. Easier qualifying for home purchases in many cases. Initial costs of the loan are usually smaller. Ability to qualify for a larger loan at the lower interest rate. ARMs respond to the needs of housing demand (borrower's needs), by providing for lower payments in the early years of the loan, or by offering assurance that a temporarily high market interest rate will not prevail for the entire life of the loan. In some cases, the lower rate can mean a larger loan and a larger house. Generally easier assumability upon resale. 9-14 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 9: FIXED RATE MORTGAGE AND ALTERNATIVE MORTGAGE INSTRUMENTS
No prepayment penalties. DISADVANTAGES OF ARM
Income may not increase proportionately with increases in payments. In a slow real estate market, the rate of appreciation may be less than the rate of increase in the interest rates; that is, the spread between the value of the property and the outstanding loan balance could shrink each year, rather than increase. In some cases, the prospect for negative amortization means that borrowers may owe more than they would net out of the resale proceeds if the property is sold in the early years. The risk of rising interest rates is borne partly by the borrower, since the risk of change in the cost of funds can be shifted entirely to the borrower, within maximum caps allowed over the life of the loan. CALIFORNIA ADJUSTABLE–RATE NOTE
The notes that will be reviewed in this section are those issued by Fannie Mae/FHLMC as of January 2001, with four notes in the series. All of these notes will use U.S. Treasury Securities as an index. ADJUSTABLE–RATE NOTE (1 YEAR TREASURY INDEX RATE CAPS)
This note is shown in Form 9–1. The top of the first page of the note states in bold type that the note contains provisions that allow the interest rate and monthly payment to change. This note limits the amount the interest may change at any...
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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