August 18, 2000,
Revised March 18, 2003
Calculators 7b and 7c show how monthly mortgage paymentswill change under a variety of possible future interest-rate scenarios, as
defined by the user. 7b covers adjustable rate mortgages (ARMs) on which the
monthly payment is always "fully amortizing", meaning that the payment
would pay off the loan in full if continued over the remaining life at the
current interest rate. 7c covers ARMs on which the payment is not
necessarily fully amortizing, and amortization may be negative -- meaning that
the payment does not cover the interest, so the difference is added to the
balance.
The calculatorswork on both new and old
mortgages. If it is a new mortgage, you enter the loan amount, initial interest
rate and term on the first 3 lines. If it is an old mortgage, you enter the
current balance (the amount you still owe), the current interest rate, and the
period remaining to term. For example, if it was a 30-year loan but you are 5
years into it, you have 25 years (300 months) remaining.
Your amortization schedule should begin
in the month your first payment is due if this is a new loan. If it is an
existing loan, it should begin with the month when the next payment is due.
The item "Select
Interest Rate Index" requires you to identify the interest rate index that
your particular ARM contract uses. The rate on every ARM is tied to movements in
a specific interest rate series that is published periodically. About a dozen
different series are used, and the one that applies to your ARM is shown in the
ARM disclosure form that was given to you when you took out the loan. If you
don't have it, call up the servicing agent to whom you send your payments and
ask for the information.
Once you identify the index, the
calculator will provide its most recently published value,
provided I have been diligent in keeping it up to date. If not, here are
some sites at which current index values are maintained:
http://www.federalreserve.gov/releases/,
http://www.hsh.com/indices/11cof00s.html,
http://www.bankrate.com/brm/ratehm.asp,
http://www.nfsn.com/library/mta.htm,
http://www.mortgage-x.com/general/mortgage_indexes.asp,
http://nt.mortgage101.com/partner-scripts/1196.asp?p=low-rate-mortgages.
The "Margin" is the amount
that is added to the interest rate index to determine your ARM rate. It usually
ranges from 2.5 to 3%. The margin that applies to your ARM is shown in the ARM
disclosure form and on the mortgage note. If you can't find it, call up the
servicing agent to whom you send your payments and ask for it.
The "Number of Months to First
Adjustment" on a new loan is the period for which the initial rate holds.
On an old loan, it is the number of months until the next rate adjustment.
The "Maximum Interest Rate Change
on First Rate Adjustment" is the maximum amount by which the interest rate
can change on the first rate adjustment date. (Calculator
7c does not have this item because negative amortization ARMs don't have rate
adjustment caps.) ARMs on which the initial rate
holds for 5 years or longer but which then adjust the rate every year are likely
to have a larger cap at the first rate adjustment than on subsequent
adjustments. Hence, provision is made in the calculator for two caps, one
applicable to the first adjustment and the other applicable to all later
adjustments.
For example, a new "7/1 ARM with
caps of 5 and 2" is one where the initial rate holds for 7 years, the first
rate adjustment cannot exceed 5%, rate adjustments thereafter occur every year
and cannot exceed 2%. Hence, you would enter 84 and 5 under "First Rate
Adjustment" and 12 and 2 under "Second Rate Adjustment". If you
took out the same loan 3 years earlier, it would be 4 years until the first rate
adjustment, so the entries would be 48, 5, 12 and 2. If you took out the same
loan 8 years earlier, the first rate adjustment would have already occurred, so
the entries would be 12, 2, 12, 2.
The maximum and minimum interest ratesapply over the entire life of the mortgage. They are in your note and ARM
disclosure form.
Calculator 7c asks for
information about how payments are determined. This information does not
appear on 7b because payments on ARMs that amortize fully are always calculated
the same way.
You can select as many as 6 assumptions
about future interest rates. The more scenarios you select, the less detail you
will receive in the output schedules. For example, if you select one scenario,
the output table will show the ARM rate, the value of the index, the monthly
payment, the interest and principal components of the payment, and the balance.
If you select 6 scenarios, you will get just the ARM rate for each.
You should always look at the Stable
Index scenario as your benchmark, because it tells you what would happen if
interest rates remain the same through the life of your loan. More precisely, it
assumes stability in the specific index used by your ARM, but the interest rate
indexes all tend more or less to move together.
The Worst Case scenario is also worth
looking at because it is exactly what it says. This scenario assumes that rates
increase by as much as the contract allows. If you can deal with the payment
increases associated with this scenario, you are safe with this ARM.
Neither the no-change nor the worst-case
scenarios are likely to materialize, so the calculator allows you to design
other scenarios that you or your guru believe might be more likely. You can
assume that the index rate trends either up or down by amounts selected by you,
or fluctuates over periods and by amounts that are selected by you.
Copyright Jack Guttentag
2003
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