A variable-rate mortgage , adjustable-rate mortgage ( ARM ), or mortgage tracker is a tribal mortgage loan interest on a note is periodically adjusted based on an index that reflects the costs to the loan lenders in the credit market. Loans can be offered at the level/base level of the default variable of the lender. There may be a direct and legally defined relationship to the underlying index, but where the lender does not offer a special link to an underlying or indexed market, the rate may be changed as per the lender's policy. The term "variable-rate mortgage" is the most common outside the United States, while in the United States, "adjustable-rate mortgages" are the most common, and imply mortgages regulated by the Federal government, with caps on charges. In many countries, a customized mortgage rate is the norm, and in such places, it can be called a mortgage.
Among the most common indices are the 1-year Treasury (CMT) interest rate, the Fund cost index (COFI), and the London Interbank Offered Rate (LIBOR). Some creditors use their own cost of funds as an index, rather than using another index. This is done to ensure a fixed margin for the lender, whose own cost expenses are usually associated with the index. As a result, payments made by the borrower may change over time with an interest rate that changes (alternatively, the loan period may change). This is different from the overdue installment payments, which offer to change the payment amount but the fixed interest rate. Other forms of mortgage lending include only interest mortgages, fixed rate mortgages, negative amortization mortgages, and mortgage balloon payments.
The adjusted interest rate transfers part of the interest rate risk of the lender to the borrower. They can be used where unpredictable interest rates keep interest rate loans inaccessible. The borrower benefits if the interest rate falls but loses if the interest rate increases. The borrower benefits from the reduction of margin to the underlying loan costs compared to fixed or capped mortgage rates.
Video Adjustable-rate mortgage
Karakteristik
Indeks
- Biaya Distrik Indeks Dana (COFI) Distrik K-11
- London Interbank Offered Rate (LIBOR)
- 12 bulan Treasury Average Index (MTA)
- Constant Maturity Treasury (CMT)
- Tingkat Mortgage Contact Rata-Rata Nasional
- Bank Swap Rate Bulanan (BBSW)
In some countries, banks may issue a major loan interest rate that is used as an index. The index can be applied in one of three ways: directly, at the margin level plus base, or based on index movements.
The indirectly applied index means that the interest rate changes exactly with the index. In other words, the interest rate on the record is exactly the same as the index. From the index above, only the contract rate index applied directly.
To apply the index at the margin plus margin level means that the interest rate will be the same as the underlying index plus margin. The margin is specified in the notes and remains fixed for the life of the loan. For example, credit rates can be determined in the notes as LIBOR plus 2%, 2% to margin and LIBOR to be indexed.
The last way to apply the index is based on movement. In this scheme, the mortgage originates at an agreed rate, then adjusted based on index movement. Unlike direct or index plus margins, the initial rate is not explicitly associated with any index; adjustments are bound to the index.
Basic features
The most important ARM basic features are:
- Initial interest rate . This is the initial interest rate on an ARM.
- Adjustment period . This is the term of interest rate or loan term on ARM is scheduled to remain unchanged. This value is reset at the end of this period, and monthly loan payments are recalculated.
- Index level . Most creditors bind ARM interest rates to changes in index levels. Lenders assess the level of ARM on various indexes, the most common being the rate on one, three, or five year Treasury securities. Another common index is the national or regional average cost of funds for savings and loan associations.
- Margins . These are the percentage points that lenders grant at the index level to determine the interest rate of the ARM.
- Interest rate limits . This is a limit on how much the interest rate or monthly payment can be changed at the end of each adjustment period or during the loan term.
- Initial discount . These are interest rate concessions, often used as promotional aids, offering the first year or more of the loan. They reduce the interest rate below the prevailing rate (index plus margin).
- Negative amortization . This means that the mortgage balance increases. This happens whenever a monthly mortgage payment is not large enough to pay all interest due on a mortgage. This may be due to when the payment limit listed in the ARM is low enough that the principal payment plus interest is greater than the payment threshold.
- Conversions . An agreement with the creditor may have a clause that allows the buyer to convert the ARM into a fixed rate mortgage at the specified time.
- Prepayment . Some agreements may require the buyer to pay a special fee or penalty if ARM is repaid early. Prepay terms are sometimes negotiable.
The choice of home mortgage loans is complicated and time-consuming. As an aid to buyers, the Federal Reserve Board and the Federal Home Loan Bank Board have prepared a mortgage checklist.
Caps
Any mortgage where payments made by the borrower may increase over time brings the risk of financial difficulty to the borrower. To limit this risk, cost restrictions - known as cap in industry - are a common feature of adjustable rate mortgages. Hats usually apply to three mortgage characteristics:
- frequency of interest rate change
- periodic rate change
- the change in the total interest rate during the loan term, sometimes called life cap
For example, a given ARM may have the following types of interest rate adjustments:
- interest adjustments made every six months, usually 1% per adjustment, 2% total per year
- adjustment of interest is only once a year, usually 2% maximum
- interest rates can adjust no more than 1% within a year
Mortgage payment adjustment hat:
- the maximum mortgage payment adjustment, typically 7.5% per annum for the option-negative/amortization loan
Age of interest rate adjustment limit lending:
- The total interest rate adjustment is limited to 5% or 6% for the loan term.
The upper limit of changes in interest rates can be periodically broken down to one limit on the first periodic changes and separate limits on subsequent periodic changes, eg 5% on initial adjustment and 2% on subsequent adjustments.
Although not unusual, the cap can restrict maximum monthly payments in absolute terms (for example, $ 1000 per month), rather than in relative terms.
ARMs that allow negative amortization will typically have adjustments to payments that occur less frequently than interest rate adjustments. For example, the interest rate may be adjusted monthly, but the payment amount is only once every 12 months.
The cap structure is sometimes expressed as the initial adjustment cap / next adjustment hat /life cap , for example 2/2/5 for a loan with 2% initial adjustment, 2% limit on subsequent adjustments, and 5% limit on total interest rate adjustments. When only two values ​​are given, this indicates that the initial change cap and periodic cap are the same. For example, 2/2/5 hat structure can sometimes be written only 2/5.
Maps Adjustable-rate mortgage
Reasons for ARM
ARM generally allows borrowers to lower their initial payments if they are willing to bear the risk of interest rate changes. There is evidence that consumers tend to choose contracts with the lowest initial rate, as in the UK where consumers tend to focus on direct monthly mortgage costs. Consumer decisions can also be influenced by the advice they get, and much advice is given by lenders who may prefer ARM due to the structure of financial markets.
In many countries, banks or similar financial institutions are the main originators of mortgages. For banks funded from customer deposits, customer deposits typically have a much shorter period of time than residential mortgages. If the bank offers large volumes of fixed-rate mortgages but to get most of its funding from deposits (or other short-term funding sources), banks will have an asset-liability mismatch because of interest rate risk: in this case, it will run the risk that the income interest from his credit portfolio will be less than it takes to pay his depositors. In the United States, some argue that the saving and lending crisis is partly due to this problem, that savings and loan companies have short-term and long-term deposits, fixed rate mortgages, and were caught when Paul Volcker raised interest rates in the early 1980s. Therefore, banks and other financial institutions offer adjustable rate mortgages because it reduces risk and matches their funding sources.
The banking regulator looks at the asset-liability mismatch to avoid such problems, and places tight restrictions on the number of long-term fixed-rate mortgages that may be owned by banks (in relation to their other assets). To reduce this risk, many mortgage makers will sell their mortgage lots, especially fixed rate mortgages.
For borrowers, adjusted mortgage rates may be cheaper, but at prices bear a higher risk. Many ARMs have a "teaser period", which is an initial period of relatively short interest rates (usually one month to a year) when the ARM bears interest rates that are substantially below the "fully indexed" level. The teaser period can encourage some borrowers to see ARM as a bid more than it actually represents. The low teaser rate will affect the ARM to maintain an above-average payout increase.
Variant
Hybrid ARM
The hybrid ARM has an interest rate set for the initial time period, then floats thereafter. The "hybrid" refers to the ARM mix of fixed-rate and adjustable-rate characteristics. The Hybrid ARM is called the initial fixed-rate period and the adjustment rate, for example, 3/1, is for the ARM with a 3-year fixed interest rate period and a subsequent 1 year interest rate adjustment period. The date when ARM shifts from the fixed rate payment schedule to the customized payment schedule is known as the reset date. After the reset date, the hybrid ARM floats on the margin above the specified index as does the regular ARM.
The popularity of ARM hybrids has increased significantly in recent years. In 1998, the percentage of hybrids relative to mortgages with fixed interest rates of 30 years was less than 2%; in six years, this increased to 27.5%.
Like other ARM, hybrid ARMs transfer some interest rate risks from lenders to borrowers, thus enabling lenders to offer lower interest rates in many interest-rate environments.
ARM Options
The ARM option is usually a 30-year ARM that initially offers the borrower four monthly payment options: a certain minimum payment, interest payments only, a full amortization payment for 15 years, and a full amortization payment for 30 years.
This type of loan is also called a "pick-a-payment" or "pay-option" ARM.
When a borrower makes a Pay-Pay ARM payment that is less than the accrued interest, there is a "negative amortization", which means that the unpaid portion of the increased interest is added to the unpaid principal balance. For example, if the borrower made a minimum payment of $ 1,000 and ARM has been charged a monthly interest of $ 1,500, $ 500 will be added to the balance of the borrower's loan. In addition, the next-month interest payment will be calculated using a new higher principal balance.
ARM options are often offered with very low level teasers (often as low as 1%) which translates to a very low minimum payment for the first year of ARM. During the boom period, lenders often guarantee borrowers on the basis of mortgage payments that are below the fully amortized payment rate. This allows the borrower to qualify for a much larger loan (ie, take on more debt) than it should be possible. When evaluating the ARM Options, the cautious borrower will not focus on the teaser level or the initial payment rate, but will consider the index characteristics, the size of the "credit margin" added to the index value, and other requirements of the arm. In particular, they need to consider the possibility that (1) long-term interest rates rise; (2) their home may not appreciate or even lose value or even (3) that both risks can be realized.
ARM options are best suited for sophisticated borrowers with revenue growth, especially if their income fluctuates seasonally and they need the flexibility of payments that ARM can provide. Sophisticated borrowers will carefully manage the negative amortization rates that enable them to grow.
In this way, the borrower can control the main risk of Option ARM, which is a "payment shock", when negative amortization and other features of this product can trigger an increase in payments in a short period of time.
The minimum payment on the ARM Option can jump dramatically if the outstanding balance reaches the maximum limit on negative amortization (typically 110% to 125% of the original loan amount). In that case, the next minimum monthly payment will be at the level that will fully amortize the ARM for the remainder of its validity. In addition, the ARM Option usually has an automatic "recast" date (often every fifth year) when payment is adjusted to get ARM back on the pace to fully amend the ARM for the remaining time period.
For example, $ 200,000 ARM with 110% "neg am" cap will usually be adjusted for full amortization payments, based on current full indexed interest rates and remaining term of the loan, if negative amortization causes the loan balance to exceed $ 220,000. For a 125% disbursement, this will happen if the loan balance reaches $ 250,000.
Any loan that is allowed to generate negative amortization means that the borrower reduces his equity in his home, which increases the likelihood that he will not be able to sell it enough to repay the loan. Declining property values ​​will exacerbate this risk.
The ARM option may also be available as a "hybrid", with a longer fixed interest rate period. These products will not likely have a low-rate teaser. As a result, this kind of ARM reduces the possibility of negative amortization, and is unlikely to attract borrowers looking for "affordable" products.
ARM cashflow
ARM cash flow is the minimum payment option of a mortgage loan. This type of loan allows borrowers to choose their monthly payments from several options. This payment option usually includes an option to pay at a 30-year rate, a 15-year rate, an interest rate only, and a minimum payment rate. The minimum payment rate is usually lower than interest payments only. This type of loan can result in negative amortization. The option to make a minimum payment is usually only available for the first few years of the loan.
ARM mortgage cash flows are identical to ARM's ARM option or ARM payment option , but note that not all loans with cash flow options can be adjusted. In fact, the loan rate cash flow option retains the same cash flow options as ARM and ARM cash flow options, but remains up to 30 years.
Loan hat
Loan caps provide payment protection against payment shocks, and allow the size of interest rate certainty for those who gamble with the initial fixed rate on the ARM loan. There are three types of Caps on the Mortgage Adjustable Rate of the First Lien Interest Rate or the Adjustable Mortgage Rate of the First Lien Hybrid Interest Rate.
Initial Adjustment Rate Limit: Most loans have a higher limit for initial adjustments indexed to an initial fixed period. In other words, the longer the initial fixed period, the more banks want to potentially adjust your loan. Typically, this limit is 2-3% above the Initial Rate on a loan with an initial fixed rate for three years or lower and a 5-6% above Rate Early on a loan with an initial fixed interest rate of five years or greater.
Value Adjustment Limit: This is the maximum amount a Mortgage Adjustable Rate can charge for each consecutive adjustment. Similar to the initial cap, this cap is usually 1% above the Initial Rate for a loan with an initial fixed period of three years or more and is usually 2% above the Start Rate for a loan that has an initial fixed period of five years or greater.
Cap of Lifetime: Most First Mortgage loans have 5% or 6% Life Cap above Start Rate (this ultimately varies by creditors and credit rating).
- Industrial Term for ARM Caps
Inside the business hat is stated most often with just three numbers involved that indicate each hat. For example, 5/1 Hybrid ARM may have a 5/2/5 hat structure (5% initial stamp, 2% adjustment cap and 5% cover life) and insiders would call it a 5-2-5 hat. Alternatively, 1 year ARM may have 1/1/6 cap (1% initial stamp, 1% adjustment cap and 6% lifetime stamp) known as 1-1-6, or alternatively expressed as 1/6 cap ( leaving a single digit signifies that the initial cap and the adjustment are identical).
- Negative amortization of ARM caps
See the full article for the type of ARM that the amortization loan is negative basically. Higher risk products, such as first loans adjusted to Monthly Months with Negative Amortization and home equity credit lines (HELOCs) have different ways of managing the Cap of a First Lien First Mortgage. Monthly Loan Loan The first special loan with a negative amortization loan has an underlying rate, which is between 9.95% and 12% (the maximum rate of interest assessed). Some of these loans can have higher-level ceilings. The full index level is always listed on the statement, but the borrower is protected from the full impact of the tariff increase with the minimum payment, until the loan is overhauled, ie when the principal payments and the maturing interest will fully repay the loan at the level fully indexed.
- Home equity credit line (HELOCs)
Because HELOC is intended by banks to occupy second lien positions, they are usually limited only by the maximum interest rates permitted by law in the country where they are issued. For example, Florida currently has an 18% limit on interest rate charges. They are risky for the borrower in the sense that they are mostly indexed to the main level of the Wall Street Journal, regarded as the Spot Index, or a financial indicator that can change immediately (such as a loan based on the Prime Rate). The risk for borrowers is that the financial situation that causes the Federal Reserve to raise rates dramatically (see 1980, 2006) will affect the immediate increase of liabilities to the borrower, to a restricted level.
Popularity
Variable rate mortgages are the most common form of lending for home purchases in the UK, Ireland and Canada but are not popular in some other countries such as Germany. Level mortgage rates are very common in Australia and New Zealand. In some countries, fixed-rate mortgages are not really available except for short-term loans; in Canada, the longest period for which the mortgage interest rate can be fixed is usually no more than ten years, while the mortgage maturity is usually 25 years.
In many countries, it is not possible for banks to lend fixed rates for long periods of time; in these cases, the only type of mortgage worth offering by banks is the adjustable rate of mortgages (prohibiting some form of government intervention). For example, the mortgage industry in Britain has traditionally been dominated by building societies. Since funds collected by UK building societies must be at least 50% of deposits, lenders prefer fixed-rate mortgages to fixed-rate mortgages to reduce the potential interest rate risk between what they charge in mortgage interest and what they pay with interest and other deposits. sources of funding.
Countries where fixed rate loans are a form of general lending for home purchases usually need to have a special legal framework to enable this. For example, in Germany and Austria's popular Bausparkassen, a kind of mutually constructive society, offering long-term fixed-rate loans. They are legally separated from the bank and require the borrower to save a sizeable amount, with a somewhat lower fixed rate, before they get the loan; this is done by requiring the borrower in the future to start paying in his fixed monthly payment before actually getting the loan. Generally it is not possible to pay this as a one-time payment and get an immediate loan; it should be done in monthly installments of the same size as will be paid during the mortgage refund phase. Depending on whether there are enough savers in the system at any given time, loan repayment may be delayed for some time even when the savings quota has been met by the prospective borrower. The advantage for the borrower is that the guaranteed monthly payment will not increase, and the loan age is also predetermined. The disadvantage is this model, where you have to start making payments a few years before actually getting a loan, mostly intended for a once-in-a-lifetime home buyer who is able to plan ahead for a long time. That has been a problem with the generally higher mobility that today's workers demand.
For those who plan to move in a relatively short period of time (three to seven years), variable rate mortgages may still be attractive as they often include a lower fixed rate for the first three, five, or seven years of the loan, after which interest rates fluctuate.
Pricing
Customized mortgage rates are usually, but not always, cheaper than fixed rate mortgages. Due to the inherent interest rate risk, long-term fixed interest rates will tend to be higher than short-term interest rates (which is the basis for loans with variable rates and mortgages). The interest rate differential between short-term and long-term loans is known as the yield curve, which is generally upward sloping (long-term is more expensive). The opposite is known as a reversed and relatively rare curve.
The fact that an adjustable mortgage rate has a lower initial interest rate does not indicate how much future borrowing costs (when rates change). If rates rise, the cost will be higher; if the price falls, the cost will be lower. As a result, the borrower agrees to take interest rate risk.
The actual price and adjustable rate analysis of mortgage rates in the financial industry are conducted through various computer simulation methods such as Monte Carlo or Sobol sequences. In this technique, using the assumption of the probability distribution of future interest rates, many (10,000-100,000 or even 1,000,000) possible interest rate scenarios are explored, the mortgage cash flows are calculated below each, and aggregate parameters such as fair value and interest rate effective during predicted mortgage life. Having this on hand, loan analysts determine whether a particular mortgage offer will be profitable, and whether it will represent a tolerable risk to the bank.
Payment in advance
A customized mortgage rate, like other types of mortgages, usually allows borrowers to pay for prepaid principal (or capital) early without penalty. The initial payment of part of the principal will reduce the total cost of the loan (the total interest paid), but will not shorten the time required to pay off the loan like any other type of loan. After each recovery, new fully indexed interest rates are applied to the remaining items to expire in the remaining term schedule.
If the mortgage is refinanced, the borrower simultaneously issues a new mortgage and pays the old mortgage; the latter is considered a prepayment.
Some ARMs charge a prepaid penalty several thousand dollars if the borrower seizes the loan or pays it earlier, especially in the first three or five years of the loan. [3]
Criticism
Predictor lending
Customized mortgage rates are sometimes sold to consumers who are unlikely to repay loans if interest rates rise. In the United States, extreme cases are characterized by the American Consumer Federation as predatory lending. Protection against interest rate increases include (a) a possible beginning period at a fixed rate (which gives the borrower an opportunity to increase its annual income before payments rise); (b) the maximum (hood) interest rate can rise in any year (if any limit, must be specified in the loan document); and (c) the maximum (cap) that the interest rate may rise during the lifetime of the mortgage (this must also be specified in the loan document).
Interest rate errors and excessive charges
In September 1991, the Government Accountability Office (GAO) released a study on Mortgages Rate Adjustable in the United States that found between 20% and 25% of ARM loans of about 12 million at the time contained an Interest Rate Error. A former federal mortgage banking auditor estimates these mistakes create at least US $ 10 billion in net overcharges to American homeowners. Such an error occurs when the corresponding mortgage lender selects the wrong index date, uses the wrong margin, or ignores the change of interest rate.
In July 1994, Consumer Loan Advocates, a nonprofit mortgage auditing firm announced that as many as 18% of Mortgages Rate Adjustable had borrower cost errors over $ 5,000 in interest overcharges.
In December 1995, a government study concluded that 50-60% of all Adjustable Rate Mortgages in the United States contain errors concerning variable rates imposed on homeowners. The study estimates the total amount of interest charged to the borrower for more than $ 8 billion. Inadequate computer programs, faulty document settlement and miscalculation are referred to as the main cause of interest rate hikes. No other government study has been conducted on excessive ARM flowers.
History
George Avawanis, a real estate investor and filmmaker in Brooklyn, NY, may have created the first personally issued interest rate mortgage in the United States when it shut down 38 Greene Avenue, Brooklyn, NY on April 30, 1980.
TITLE VIII, ALTERNATIVE TRANSACTION TRANSACTIONS, GARN-ST. Germain Depository Institutions Act of 1982 allows Adjustable rate mortgages.
ARM in Singapore
In Singapore, ARM is commonly known as floating rate or variable rate mortgage. Unlike fixed rate mortgages in the country, floating mortgage rates have interest rates that vary during the entire duration of the loan. This loan can be pegged to
- bank interest rate,
- SIBOR, or
- SOR
Usually the mortgage interest rate structure is as follows
Loans can be pegged to SIBOR or SOR of any duration, and spread (margin) is attached to X-month SIBOR/SOR. The spread is usually adjusted upward after the first few years.
Between SIBOR, SOR and council level, SIBOR-pegged ARM is the most popular.
However, recently, ANZ introduced the ARM pegged to the average SIBOR and SOR. To date, it is the only bank in Singapore that offers such a mortgage.
See also
- Introductory level
- The teaser number
- VA loan
- the housing bubble of the United States
- The term US mortgage
References
External links
- US. Federal Reserve Consumer Handbook on Adjustable Rate Mortgages
- US Historical ARM Index
- US historical mortgage rates, 1982 - now
- Adjustable Daily Mortgage Rate Survey from Mortgage News Daily
Source of the article : Wikipedia
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