Question on ARM's

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Trex
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Posts: 27
Joined: Sat Feb 22, 2003 1:16 am
Location: Tallahassee, FL

Question on ARM's

Post by Trex »

Hello all,

I know this may be a question for the lenders, but maybe someone can help me. Regarding ARM's (adjustable rate mortgages):

I'm looking at refinancing the first mortgage. I have been looking at the numbers for the 15 and 30 year loans, with extra payments and all kinds of stuff. I'm trying to analyze the 7/1 30 year arm. Since my wife guarantees 9 years before moving, this might be a good option.

Let's use some round figures. 70K loan amount. 30 year loan. 7/1 with 2% max increase each year, capping out at 5% above the initial rate. Initial rate = 4.5%. That's 4.5% for 7 years, worst case scenereo 9.5% in year 10 when we will probably have already sold.

I am trying to calculate the savings of additional monthly payments also, which is where I'm running into problems.

My question, if any of this makes any sense, is this: In month 85 (the beginning of the adjustable period), what dollar amount would the payment be amortized from? I figured that if I apply 250 extra every month, the balance of the 70k loan would be 37,000. Let's say my rate jumps to the max 2%/year to 6.5%. Would it be 6.5% of 70,000 or 37,000? Guidance greatly appreicated... :)

Trex
therealchips
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Posts: 174
Joined: Sat Jan 04, 2003 4:00 am
Location: Henderson, Nevada, USA

Post by therealchips »

Short answer, with only me as a source: The process of amortization involves charging interest only on the current balance, not the original balance, even if the interest rate changes.

Long answer: http://www.atlastitle.net/literature/Ad ... rtgage.htm
Under the title "Adjustment Process", there is a table that cut and paste scrambles a bit. The crucial thing is that the "Loan Amount" after the first year is the "Current Balance". The table shows:
Consider the following graph of how payments are adjusted at the beginning of each year of a one-year ARM:

ARM Period Interest Rate Loan Amount Amortization Period

Year 1 Start Rate Original Loan 360

Year 2 Margin + Current Index Current Balance 348

Year 3 Margin + Current Index Current Balance 336

Year 4 Margin + Current Index Current Balance 324

Because the amortization period is constantly decreasing, the monthly payment will remain the same or increase--even as the loan balance decreases or if the interest rate remains the same.
I'll bet this method -- charging interest only on the current balance -- is the industry standard and not peculiar to this one company or to one year ARM's. Further, I would bet that any other approach is illegal.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
Trex
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Posts: 27
Joined: Sat Feb 22, 2003 1:16 am
Location: Tallahassee, FL

Post by Trex »

Thanks Chips

Couldn't find that anywhere.

Trex
therealchips
*** Veteran
Posts: 174
Joined: Sat Jan 04, 2003 4:00 am
Location: Henderson, Nevada, USA

Post by therealchips »

My pleasure. Who wouldn't want a Tyrannosaurus rex on his side?

I searched at google on this expression:

"Adjustable Rate Mortgages" interest "current balance" "original balance"
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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