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5000 - Statements of Policy
{{6-30-08 p.5498.01}}
ILLUSTRATIONS OF CONSUMER INFORMATION FOR HYBRID ADJUSTABLE RATE
MORTGAGE PRODUCT
Important Facts About Adjustable Rate Mortgages
with a
Reduced Initial Interest Rate
Whether you are buying a house or refinancing your
mortgage, this information can help you decide if an adjustable rate
mortgage (ARM) is right for you. ARMs can be complicated, and it is
important for you to understand the features and risks of these loans.
If you do not understand how ARMs work, you should not sign any
ARM loan contracts, and you might want to consider other loans,
including fixed rate loans.
With an ARM, the interest rate and monthly payment
on the loan is not fixed and may increase.
• The interest rate changes over time according to
a formula -- typically, a base interest rate (index rate) plus a
certain percent (margin).
• For example, the rate could equal the one year U.S.
Treasury rate plus 4 percent or the rate of the 6 month "LIBOR"
index plus 3 percent.
• If the base interest rate increases, your interest rate
and monthly payment will also increase.
If an ARM has a reduced interest rate for an initial
period -- for example, the first 2 years or first 5 years of the loan
-- the rate and the monthly payment may increase significantly. When
that initial period is over:
• The interest rate and monthly payment may
increase significantly even if the index rate stays the same.
• The interest rate and monthly payment will increase even
more if the index rate increases.
Do not assume that you will be able to refinance an
ARM to a lower rate in the future.
Additional Information
|a8 Payments for taxes and insurance.
In some mortgages, your monthly payment includes both principal
and interest and an "escrow" amount to cover real estate taxes
and insurance. Your lender then pays your taxes and insurance out of
these escrow funds. In other mortgages, your monthly payment covers
only principal and interest, and you are responsible for budgeting for
and paying real estate taxes and insurance premiums when the bills
arrive. These costs can be substantial. When you are comparing
mortgages, or deciding whether you can afford one, you need to know
whether or not the monthly payment includes an amount to cover taxes
and insurance.
|a8 Prepayment penalties. Some mortgages
require you to pay a large prepayment penalty if you sell your home or
refinance during the first few years of the loan -- which you may need
to do if your interest rate, and therefore your payment, is about to
increase significantly, or if your circumstances change and you must
sell your home before the prepayment period expires. The amount of the
penalty will be added to your loan payoff amount. A prepayment penalty
can make if difficult, or very expensive, to sell your home or
refinance. You need to know whether your loan has a prepayment penalty,
how much it is, and how long it will apply.
|a8 Balloon payments. Most mortgages are set
up so that you pay off the loan gradually by the monthly payments that
you make over the loan term (for example, 30 years). Some mortgages,
however, are set up with "balloon payments" -- you make the same
monthly payments that you would for a 30-year loan, but after a shorter
period of time (for example, 10 years), you will owe one large final
payment of the entire remaining balance of the loan. If you are unable
to make the balloon payment when it is due, you would need to refinance
your loan -- or sell your home. You need to know whether your loan has
a balloon payment.
|a8 No Doc/Low Doc Loan. Be aware that
"reduced documentation" or "stated income" loans usually
have higher interest rates or other costs compared to "full
documentation" loans that are available if you document your income,
assets, and liabilities. These higher costs can be
substantial.
{{6-30-08 p.5498.02}}
Illustration 2A
| SAMPLE
MORTGAGE COMPARISON (Not actual loans
available) |
Sample Loan Amount $200,000 -- 30-Year Term
-- Interest Rates For Example Purposes
Only
|
Fixed Rate
Mortgage 7.5% |
Reduced Initial Rate "2/28"
ARM 7% for two years, then adjusting to variable rate based on
index interest rate, subject to annual rate caps; 10% rate in Year
3; 11.5% rate in Year 4; 13% maximum ARM rate in Years
5-30 |
|---|
|
|
|
| Years
1-2 |
$1,598 |
$1,531 |
| Year 3 -- even if index interest rate does
not change |
$1,598 |
$1,939 |
| Year 4 -- even if index interest rate
does not change |
$1,598 |
$2,152 |
| Year 5 -- if index interest
rate rises 1.5% (maximum ARM
rate) |
$1,598 |
$2,370
| |
Illustration 2B
| SAMPLE
MORTGAGE COMPARISON (Not actual loans
available) |
Sample Loan Amount $200,000 -- 30-Year Term
-- Interest Rates For Example Purposes
Only
|
Fixed Rate
Mortgage 7.5% |
Reduced Initial Rate "5/25"
ARM 7% for five years, then adjusting to variable rate based on
index interest rate, subject to annual rate caps; 10% rate in Year
6; 11.5% rate in Year 7; 13% maximum ARM rate in Years
8-30 |
|---|
|
|
|
| Years
1-5 |
$1,598 |
$1,531 |
| Year 6 -- even if index interest rate does
not change |
$1,598 |
$1,910 |
| Year 7 -- even if index interest rate
does not change |
$1,598 |
$2,109 |
| Year 8 -- if index interest
rate rises 1. 5% (maximum ARM
rate) |
$1,598 |
$2,311
| |
{{6-30-08 p.5498.03}}
Illustration 2C
| SAMPLE
MORTGAGE COMPARISON (Not actual loans
available) |
Sample Loan Amount $200,000 -- 30-Year Term
-- Interest Rates For Example Purposes
Only
|
Fixed Rate
Mortgage 7.5% |
Reduced Initial Rate "5/25"
ARM 7% for five years, then adjusting to variable rate based on
index interest rate, subject to annual rate caps; 10% rate in Year
6; 11.5% rate in Year 7; 13% maximum ARM rate could apply in
Years 8-30 |
Reduced Initial Rate "2/28" ARM 7%
for two years, then adjusting to variable rate based on index interest
rate, subject to annual rate caps; 10% rate in Year 3; 11.5%
rate in Years 4-7; 13% maximum ARM rate could apply in Years
5-30 |
|---|
|
|
|
| Years
1-2 |
$1,598 |
$1,531 |
$1,531 |
| Year 3
|
$1,598 |
$1,531 |
$1,939 |
| Year 4
|
$1,598 |
$1,531 |
$2,152 |
| Year 5
|
$1,598 |
$1,531 |
$2,152 |
| Year
6 |
$1,598 |
$1,910 |
$2,152 |
| Year
7 |
$1,598 |
$2,109 |
$2,152 |
|
|
|
|
| Year
8 -- if index interest rate rises 1.5% (maximum ARM
rate) |
$1,598 |
$2,311 |
$2,359
| |
[Source: 73 Fed. Reg. 30997, May 29, 2008]
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