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| Real Life Information... on Home Related Topics - Mortgage Information |
Adjustable Rate Mortgages (ARMS)
Interest-rate caps
An interest-rate cap places a limit on the amount your interest rate can increase.
Interest caps come in two versions:
periodic adjustment caps, which limit the amount the interest rate can adjust up or
down from one adjustment period to the next after the first adjustment, and lifetime
caps, which limit the interest-rate increase over the life of the loan. By law, virtually all
ARMs must have a lifetime cap.
An interest-rate cap places a limit on the amount your interest rate can increase.
Interest caps come in two versions:
periodic adjustment caps, which limit the amount the interest rate can adjust up or
down from one adjustment period to the next after the first adjustment, and lifetime
caps, which limit the interest-rate increase over the life of the loan. By law, virtually all
ARMs must have a lifetime cap.
No-Doc/Low-Doc Loans
When you apply for a loan, lenders usually require
documents to prove that your income is high enough
to repay the loan. For example, a lender might ask to
see copies of your most recent pay stubs, income tax
filings, and bank account statements. In a no-doc or
When you apply for a loan, lenders usually require
documents to prove that your income is high enough
to repay the loan. For example, a lender might ask to
see copies of your most recent pay stubs, income tax
filings, and bank account statements. In a no-doc or
low-doc loan, the lender doesn't require you to bring proof of your income, but you will
usually have to pay a higher interest rate or extra fees to get the loan. Lenders
generally charge more for no-doc/low-doc loans.
usually have to pay a higher interest rate or extra fees to get the loan. Lenders
generally charge more for no-doc/low-doc loans.
Periodic adjustment caps
Let's suppose you have an ARM with a periodic adjustment interest-rate cap of 2%.
However, at the first adjustment, the index rate has risen 3%. The following example
shows what happens.
Examples:
All of the following examples are based on a $200,000 loan amount and a 30-year
term. Payment amounts in the examples do not include taxes, insurance,
condominium or home-owner association fees, or similar items. These amounts can
be a significant part of your monthly payment.
In this example, because of the cap on your loan, your monthly payment in year 2 is
$138.70 per month lower than it would be without the cap, saving you $1,664.40 over
the year.
Let's suppose you have an ARM with a periodic adjustment interest-rate cap of 2%.
However, at the first adjustment, the index rate has risen 3%. The following example
shows what happens.
Examples:
All of the following examples are based on a $200,000 loan amount and a 30-year
term. Payment amounts in the examples do not include taxes, insurance,
condominium or home-owner association fees, or similar items. These amounts can
be a significant part of your monthly payment.
In this example, because of the cap on your loan, your monthly payment in year 2 is
$138.70 per month lower than it would be without the cap, saving you $1,664.40 over
the year.
Some ARMs allow a larger rate change at the first adjustment and then apply a
periodic adjustment cap to all future adjustments.
A drop in interest rates does not always lead to a drop in your monthly payments. With
some ARMs that have interest-rate caps, the cap may hold your rate and payment
below what it would have been if the change in the index rate had been fully applied.
The increase in the interest that was not imposed because of the rate cap might carry
date, your payment might increase even though the index rate has stayed the same or
declined.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
periodic adjustment cap to all future adjustments.
A drop in interest rates does not always lead to a drop in your monthly payments. With
some ARMs that have interest-rate caps, the cap may hold your rate and payment
below what it would have been if the change in the index rate had been fully applied.
The increase in the interest that was not imposed because of the rate cap might carry
date, your payment might increase even though the index rate has stayed the same or
declined.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
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