Understanding adjustable mortgage loans

    59
    0
    Understanding adjustable mortgage loans
    Understanding adjustable mortgage loans

    Adjustable Mortgage Loans

    Many mortgage loans have an interest rate that changes or has other special provisions that result in the interest rate and/or payments changing from time to time.

    What is an Adjustable Rate Mortgage (ARM) loan?

    This is a loan in which the interest rate is adjusted periodically usually based upon an index to keep your interest rate near current market rates.  The amounts and times of adjustment are agreed upon in the loan documents executed at closing.  Rates are tied to an index specified in the original loan documents.  The principal and interest payment amount is adjusted according to the rate adjustment or preset amounts in your loan documents.

    What is a rate index?

    This is a published interest rate, such as a government Treasury Bill, used by lenders to adjust your interest rate either up or down at the agreed upon intervals.

    Who publishes the rate indexes?

    Rate indexes are published by a variety of institutions, such as Wall Street (The Wall Street Journal), the Federal Reserve, and Fannie Mae.

    How is my new interest rate calculated?

    Most commonly, your new interest rate is calculated by adding the current index value to the margin disclosed in your Adjustable Rate Note and Rider.  There are many other methods of calculation, but they are agreed upon in the loan documents executed at closing.

    How is my new principal and interest payment amount calculated?

    Most commonly, your new principal and interest payment amount is calculated based on these factors: the new interest rate, projected unpaid principal balance as of the scheduled payment adjustment date, and remaining loan term.  Each time the interest rate is adjusted, the newly calculated principal and interest payments are usually amortized over the remaining term to arrive at the new principal and interest payment amount required to satisfy the loan.

    What are lifetime interest rate floor and ceiling caps?

    These rates specify the minimum (floor) and maximum (ceiling) amounts to which your interest rate may adjust over the life of the loan as specified in your Adjustable Rate Note and Rider.

    What are periodic rate caps?

    These rates specify the minimum and maximum amounts to which your interest rate may adjust per adjustment cycle.

    Will I be notified of an interest rate change?

    A notice will be mailed to you prior to the principal and interest payment adjustment effective date.  This notification will provide you with the new interest rate, current index value, projected unpaid principal balance, new principal and interest payment amount, and effective date.

    What is the Servicemembers Civil Relief Act (SCRA)?

    The Servicemembers Civil Relief Act (SCRA), formerly known as Soldiers and Sailors Civil Relief Act, was established in 1940 to provide relief measures to persons in active military status.  According to Section 526 of the 1940 Act, all debt incurred by a servicemember prior to active military duty service will be charged a maximum interest rate of 6% during the period of active military duty service.

    Whom should I notify if I am in active military duty service?

    If your debt was incurred prior to you going into active military duty service, please send your military orders to our Special Loans Department via mail or facsimile.

    Whom should I notify of a change in status of my active military duty service, such as an expiration or extension?

    If your active military duty status has either expired or been extended, please contact our Customer Service Department at (800) 247-9727.  You may also send written notice to our Special Loans Department via mail or facsimile.

    How will I be notified of the reduced rate and payment amounts as a result of my military status?

    A notice will be mailed to you via U.S. mail.  This notification will provide you with the new interest rate, principal and interest payment amount, and effective date.

    What is an interest only mortgage loan?

    This is a mortgage loan in which the scheduled monthly payment amount consists of interest only.  The interest only payment lasts for a specified period of usually 5 to 10 years.  Customers have the right to pay more than interest if they wish to do so.

    If the customer pays interest only, the payment will not include any repayment of principal and the loan balance will remain unchanged.  For example, if a 30-year loan of $100,000 at 6.25% is interest only, the required payment is $520.83.  In contrast, customers who have the same loan without an interest only feature would have to pay $615.72.  This is the fully amortizing payment, or the payment that would pay off the loan over the term if the rate remained the same.  The difference in payment of $94.89 is principal, which goes to reduce the loan balance.

    How is my interest only payment amount calculated?

    Your interest only payment amount is calculated by multiplying the unpaid principal balance by the interest rate and dividing by 12 months in a year.  An example is provided below.

    $100,000.00 (Unpaid Principal Balance) x 6.25% (Interest Rate) / 12 (Months in a Year) = $520.83 (Interest Only Payment Amount)

    How long is the interest only period?

    The length of the interest only period is indicated in your Note and/or Interest Only Addendum.

    What is a simple interest mortgage loan?

    This is a loan in which interest is calculated daily based on the unpaid principal balance.  Unlike a monthly amortizing loan, a simple interest loan requires that the customer pay additional interest for every day payment is not received past the due date.

    How is my simple interest payment amount calculated?

    Your simple interest payment amount may be calculated by multiplying the unpaid principal balance by the current interest rate, dividing by 365 days in a year, and multiplying by the number of days elapsed from the last payment received date to the current payment received date. An example is provided below. 

    $100,000.00 (Unpaid Principal Balance) x 6% (Interest Rate) / 365 (Days in Year) x 35 (Number of Days Elapsed from Last Payment Received Date to Current Payment Received Date) = $575.34 (Simple Interest Payment Amount).

    Your simple interest payment amount may be calculated by multiplying the unpaid principal balance by the current interest rate, dividing by 360 days in a year, and multiplying by the number of days elapsed from the last payment received date to the current payment received date.  An example is provided below. 

    $100,000.00 (Unpaid Principal Balance) x 6% (Interest Rate) / 360 (Days in Year) x 35 (Number of Days Elapsed from Last Payment Received Date to Current Payment Received Date) = $583.33 (Simple Interest Payment Amount).

    LEAVE A REPLY

    Please enter your comment!
    Please enter your name here