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| What is an Adjustable Rate Mortgage
(ARM)? back to top
|
An Adjustable Rate Mortgage
has an interest rate that can change periodically. The
amount of the first change is based on an index. Subsequent
changes depend on economic conditions and may create payment
increases or decreases during the life of the loan. The
ARM note stipulates how often your interest rate and payment
will change, as well as the index to be used. The changed
rate will be used to calculate your principal and interest
payment within the boundaries of any payment rate caps
that will apply to your loan.
An ARM usually offers a lower initial interest rate than
a fixed-rate loan. You may be able to qualify for a larger
loan amount with an ARM because the credit decision can
be based on current income and the first year's monthly
payments, which will most likely be lower.
One disadvantage to an ARM is that an increase in interest
rates may cause your monthly principal and interest payments
to be higher.
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| How is the interest rate calculated
on an ARM loan? back to top |
Most ARM loans calculate
the interest rate adjustment by adding a margin to the
index. The index is a published rate such as the weekly
one-year Treasury bill or the 11th Federal Reserve District
cost of funds. Changes in the index may cause changes
in your interest rate. The type of index to be used is
determined at the time of application.
The margin is a fixed value that is added to the index
to calculate the new interest rate on your loan. This
value is stated in your ARM note. The result of the calculation
may or may not be rounded. This factor is also outlined
and agreed to when your sign your ARM note.
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| What is the ARM adjustment period? back to top |
The frequency with which
your interest rate may change is called the initial note
adjustment period. The most common ARM adjustment periods
are every 6 months or every 12 months. The frequency of
ARM adjustments is established at the time of application
and the terms will be outlined in your ARM note.
There are ARM products available where the initial interest
rate will be fixed for the 1st, 3rd, 5th, 7th or 10th
years, and then adjust annually thereafter for the life
of the loan. There are also loan products available where
the interest rate changes monthly, but the principal and
interest payment change annually.
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| What is an interest rate cap? back to top |
An interest rate cap limits
the amount your interest rate can change at each adjustment.
There can be two types of interest rate caps:
- Periodic change caps, which
limit the amount your rate may increase or decrease
at each rate change.
- Life of loan caps (also referred
to as the ceiling and the floor), which specify
the highest or lowest the interest rate can ever be
on your loan.
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| What is a payment cap? back to top |
A payment cap limits the
amount the principal and interest payment on your loan
can increase or decrease at each payment change. Typically,
at every 5th payment change, you will be required to make
a fully amortizing principal and interest payment.
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| What is negative amortization?
back to top |
Negative amortization occurs
when interest rates change more frequently than payments
or where payment changes are capped. Your payment may
not be sufficient to cover the interest accruing on your
loan. If this happens, the principal balance will grow
by the amount of unpaid interest because you are borrowing
from the equity in your home to pay this interest.
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| Can I convert my loan from an ARM
to a fixed rate loan? back to top |
Unless your loan documents specifically allow for this
option, you may not convert your loan to a fixed rate
loan without paying off your current mortgage and refinancing
to a fixed rate mortgage.
If your loan documents do provide for this option, they
will specify when you can exercise this option and how
the fixed rate will be determined. The conversion rates
are typically published on the first business day of the
month.
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| Can I convert my loan from an
ARM to a fixed rate loan? back to top |
There are two situations
in which your interest rate can go up when the index goes
down.
- If your initial interest rate was
a discounted rate it will rise by at least the amount
of the margin on the first adjustment date, no matter
where the index is moving.
- If the prior interest rate adjustments
were limited by a periodic change cap or life-of-loan
cap, the next change may be to a higher rate even
if the index goes down. The following example will
illustrate how this can occur:
The initial rate on your loan was discounted to 6.00%
from the fully indexed rate of 7.50% (5.50% index
plus a 2.00% margin). If, on the first rate change
the index has decreased from 5.50% to 5.25%, your
interest rate will still increase because the new
interest rate is now calculated by using the fully
indexed rate (no more discount), which is 5.25% index
plus 2.00% margin which equals 7.25%. Thus the index
can actually go down (e.g. from 5.50% to 5.25%), but
the interest rate that determines your payment goes
up (from 6.00% to 7.25%).
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| What are my three payment options
on a choice loan? back to top |
- Option one is the minimum required
principal and interest payment amount you can make.
- Option two is an interest only payment.
This option can only be made if it is greater than
option one.
- Option three is a fully amortizing
principal and interest payment. This option is only
available if it is greater than option one and two.
There may be times when all three options
are not available. If option one is more than an interest-only
payment, you may have only options one and three. If option
one is equal to or greater than a fully amortizing principal
and interest payment, you will only have option one available.
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| Why is my interest rate going
down, but my principal and interest payment is going up?
back to top |
| This is a common occurrence
with Choice loans. It will be the case if the payment
cap limited the previous principal and interest payment.
Also, since the interest rate is changing monthly, the
previous interest rate is not indicative of the interest
rate used to calculate the principal and interest payment
at the last adjustment. |
BiWeekly Advantage SM Plan |
How does The Biweekly Advantage
Plan work? back to top |
One-half of your monthly
mortgage payment is drafted from your checking or
savings account every 14 days. That works out to
26 drafts a year. The result is that you make one
extra full payment each year. That payment is applied
100% to the principal balance of your mortgage,
paying off your loan years ahead of schedule and
thereby saving you thousands of dollars in interest.
At the beginning of the plan you will make your
regular mortgage payment, and within the next 2
weeks the first biweekly draft will be collected
(and every 14 days thereafter). |
What does The Biweekly Advantage
Plan cost? back to top |
There is a $375 enrollment fee which can be paid by check, Mastercard, Visa or
Discover. There is also a biweekly transaction fee (currently $.75) to cover bank costs associated
with the electronic transfer and normal lender information changes that occur.
There is a $20 fee for a biweekly draft that is returned for non-sufficient funds. If you change
accounts or banks, there is a $10 service fee to adjust our drafting records.
If you do not keep up with your biweekly drafts, your plan may be cancelled without refund of any
fees. As an added precaution, it is suggested you consider overdraft protection. |
Could my biweekly payment
ever change? back to top |
| Yes. Your monthly
mortgage payment may go up or down as a result of
your annual escrow analysis, or due to changes in
taxes or insurance. After proper notification, we
will adjust your biweekly drafts accordingly. |
What if I sell my house or I
refinance my existing loan? back to top |
| Simply transfer the
plan to your new home loan for a small transfer
fee. |
How do I qualify for The
BiWeekly Advantage Plan? back to top |
| Most loans qualify
as long as you have a good payment history. |
