PAY OPTION ARM
LOAN
This loan program will give you an
ability to make lowest possible payment if necessary.
This is an ideal solution for investors who for a
certain period might have a vacant property;
therefore you will make a minimum payment. Once your
property is rented, that you can either make Interest
Only Payment, 30 - year fixed payment or 15 year fixed
payment.
Pay Option ARM in a new loan program
allowing customers to choose from up to 4 different
payments. This loan program is part of an ARM, but with
added flexibility of making one of the 4 payments.
Interest sensitive Loan
Your initial start rate varies from
1.000% to anywhere around 4.000%. The initial start rate
is held only for one month, after that interest rate
changes monthly.
4 major choices are:
1) Minimum payment: For the first 12
months interest rate is calculated using the start rate,
after that interest rate is calculated
annually.
Example:
Loan Amount: $200,000.00
Initial
Rate: 1.25%
Index: 3.326 (MTA as of
October 2005)
Margin: 2.75%
Payment Cap:
7.5%
Fully Indexed Rate: 6.076% (index + margin
)
|
Minimum Payment Changes: |
|
Year 1 |
$666.50 |
Minimum Payment |
|
Year 2 |
$716.49 |
= $666.50 + 7.50% |
|
Year 3 |
$770.22 |
= $716.49 + 7.50% |
|
Year 4 |
$827.99 |
= $770.22 + 7.50% |
|
Year 5 |
$890.09 |
= $827.99 +
7.50% |
The Option ARM's 7.5% payment cap
limits how much the payment can increase or decrease
each year, except for every fifth year (beginning in the
10th year on certain programs), when the cap does not
apply. In the event your balance exceeds your original
loan amount by 125% (110% in N.Y.), the payment amount
may change more frequently without regard to the payment
cap.
Because you are paying "minimum
payment" this option will defer a payment of an interest
which will be added to your balance.
Minimum Payment Adjustment Period:
The minimum payment is usually set to 12 months, unless
negative amortization limit is reached.
Minimum Payment Cap: This is a limit on how
much the minimum payment can change. Your payment cap
will be 7.5% for the first five years. On your next
payment due, your minimum payment cannot increase or
decrease more than 7.5%. If it does than a loan is
recast.
Recast (Recasting) or re-calculating
your loan is a way of limiting negative amortization
(neg-am). Option ARM's recast every 5 years. When the
loan is recast, the payment required to fully amortize
the loan over the remaining term becomes the new minimum
payment.
2) Interest Only Payment: With
Interest Only you will avoid deferred interest, because
you are paying principal and interest. If you pay only
Interest or Principal your loan balance will increase
because you are adding either principal payment or
interest payment to your loan balance, thus leading
towards Neg-Am Loan.
Your payment may change on monthly
basis based on ARM index (LIBOR,COFI,MTA).
Minimum Payment and Interest
Only Loan is based on:
a) Index:
CMT-MTA-COFI-CODI-COSI-LIBOR-Prime Rate.
b) Margin: Is given to you by your
lender, and it is the difference between the index rate
and the interest charged to the borrower
For example 5/1 ARM. This loan is
fixed for 5 years after which in 6th year it becomes an
adjustable loan. Your loan officer will tell you
what your index is and what your margin is. Usually 5/1
arm is tied to 1-year treasury index and margin is
around 2.00%-3.00%
Your index + margin = Fully Index
rate . Your new note rate (interest rate) after 5th
year.
What about the 6th year? What would
your payment be?
Let's say that your loan officer
told you that your margin is 2.5% with 1 year treasury
index. You will have to look up 1 year treasury index
for a specific month.
1 year treasury as of Oct.2005 is
4.18, and you know that your margin is 2.5%. Therefore
you new interest rate is 1 year treasury
4.18% (index) + 2.5% (margin) = 6.68% for the
beginning of 6th year.
Index rate are move on monthly
basis, therefore your payment may fluctuate each month.
In most cases banks wills end you a statement advising
you that your rate will change.
c) To protect consumers from high
index rates, lenders implemented a CAPS.
An example of this is a 2/6 cap,
which allows the interest rate on your ARM loan to go up
or down by no more than two percent every adjustment
period, and has a total limit of six percent for
cumulative changes. Therefore a 2/6 cap on a 5% ARM will
allow a maximum rate (6 + 5%) of no more than
11%.
In some cases you will see 2/2/6,
which means 2% adjustment with 2 year prepayment penalty
and total of six percent of cumulative
changes.
3) Fully Amortizing 30-Year Payment: It's
calculated each month based on the prior month's
interest rate, loan balance and remaining loan term.
When you choose this option, you reduce your principal
and pay off your loan on schedule.
4) Fully Amortizing 15-Year Payment:
It is calculated from the first payment due
date.
Equal Housing
Opportunity (c)
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(1AmericanFinancial.com)