When we first start working with a client, We tell you that our company is different from others in the mortgage industry. We will always keep you up-to-date on the major changes in the market that could affect your financial goals or the goals of those close to you.
This is one of those times. In a recent New York Times article, the subprime lending collapse was faulted for "industry-wide problems" that affect more than just those borrowers with poor credit or subprime Adjustable Rate Mortgages (ARMs). Now, because of credit tightening, even borrowers with good credit and A-paper ARMs are expected to feel the effects of the changing market.
If you or someone you know has an ARM that is scheduled to reset anytime in the next 18 months, I urge you to share with them the following worksheet for estimating the new interest rate they will face once their ARM resets. Unfortunately, foreclosures are on the rise throughout the country, and many of these situations could've been avoided if the borrowers better understood how to read their loan documents and anticipate the fluctuating component of their home loan. Don't let this happen to you, your friends, or your loved ones. If you have any questions or trouble filling out the ARMs worksheet, please do not hesitate to call me. I'll be glad to sit down with you or your loved ones, and we can complete the worksheet together. Call me and set up a free consultation. My number is 866-900-2342 toll free. We are here to help.
Adjustable Rate Mortgage Worksheet Calculating Your Risk
Congress, many state legislatures, and the Federal Reserve are currently reviewing how ARM disclosures are presented to borrowers to ensure a better understanding of the mortgage process. Until then, it's up to you to protect yourself and your family. Don't get caught off guard. Pull out your ARM loan documents and use this worksheet to estimate what your payments will be when your ARM resets. (Note: If you have a Payment Option ARM, please call me right away. Payment Option ARMs have special features not covered in this worksheet.)
As you know, the initial interest rate on an ARM is generally locked for a predetermined period (typically between 12 months and 120 months). When this fixed-rate period of the ARM expires, the interest rate is then subject to change. Find your initial interest rate on your paperwork and write it down in the space provided. Now let's examine the initial interest rate cap, which is the highest rate your ARM can reach on its first adjustment. This interest rate cap typically ranges between 2 to 5 percentage points, depending on the terms of the note. The initial interest rate cap will be in effect for 6 to 12 months before it is subject to adjust or reset. (The cap on all subsequent adjustments to the interest rate should be either 1.00% or 2.00%.) If this is the first adjustment to your ARM, write in your initial interest rate cap in the space provided. Be careful not to confuse this with your life-time cap, which is the highest rate your loan can adjust to throughout the life of the loan. If you have a life-time cap on your ARM, write it in below.
Initial ARM Interest Rate Adjustment
__________________Initial Interest Rate
__________________Initial Interest Rate Cap
_______________Interest Rate Index + ______Margin =_________Adjusted Rate
(or Initial Rate Cap, whichever is less)
Subsequent ARM Interest Rate Adjustment(s)
____________________Current Adjusted Rate
___________Interest Rate Index + _______Margin
or (whichever is less)
___________Current Rate + ________ 1% or 2%, Per you loan terms =_____________Adjusted Rate
(must not exceed Life-Cap)
In addition to the initial interest rate cap, there are two other components that determine the interest rate when the ARM adjusts. The first component is what is known as the interest rate index. The index is the fluctuating component of the new interest rate and is based on, or tied to, any one of several indices tracked by the Wall Street Journal. These include, but are not limited to: the various London Interbank Offer Rates (LIBOR) and U.S. Treasuries, as well as the Prime Rate. Locate your interest rate index and write in the current rate above. Finally, we have what is known as the margin. The margin is the fixed number that, when added to the index, determines the interest rate the borrower will be charged upon adjustment. Locate your margin and write it in above. To calculate your adjusted rate, add the interest rate index to the margin and, if the rate is less than your initial interest rate cap, this is your new rate. Remember, your first adjusted rate cannot exceed your initial interest rate cap. If your adjusted rate is higher, then your initial cap rate will be your rate until your next adjustment. The cap on all subsequent adjustments to the interest rate should be either 1.00% or 2.00%, depending on the terms of your loan. In addition, your adjusted rate cannot exceed the life-time cap. Insert the appropriate figures into the table above. If your adjusted rate is less than your life-time cap, then this is your new rate. If your adjusted rate is higher than your life-cap, then your new rate is the life-cap rate. Below is a sample ARM with the first two adjustments calculated for you. Notice the change in the monthly mortgage payments! Don't let this happen to you or someone you love.
If you don't like what you see, or you're still having trouble working out the numbers, call me for a free consultation right away. There are a variety of fixed-rate products and government programs designed to help you get out of your ARM today.
FHA loans are a great option for those homeowners wishing to refinance out of their Adjustable Rate Mortgage into a safe, secure & affordable FHA backed Home loan. VanDyk Mortgage is a Direct Lender of FHA loans and has been for over 21 years. Call the experts. Call VanDyk.
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