Anadjustableratemortgage(“ARM”)isaloanwheretheinterestrateandmonthlypayment arenotfixed, butchangeperiodicallyduringthelifeoftheloantocorrespondwithmovementsinanindexrate. The conceptofadjustableratefinancingisbasedontheborrowerandthelendersharingtherisksofa fluctuatingeconomy. Ifinterestratesrise,theborrower’sinterestrateandmonthlypaymentincrease;if interest rates fall, the borrower’s interest rate and monthly payment decrease.
This article is intended to provide basic information about ARMs, and to assist home buyers in understanding and comparing the complex features ofARMs.
Adjustment Interval. The adjustment interval is the frequency with which the interest rate and/or monthly payment can be changed. With most ARMs, the adjustment interval is every year, every three years, or every five years. Usually, the monthly payment is adjusted at the same time as the interest rate is adjusted. However, with some ARMs, the interest rate can be adjusted more frequently than the monthly payment.
Index. The index is the rate used indexes are the rates on Treasury bills or securities. However, some lenders use other indices, such as the average cost of funds to savings and loan associations.
Margin. The margin is the amount or percentage added to the index at each adjustment interval to determine the new interest rate on the ARM. Lenders set different margins, typically ranging from 2% to 4%.
Interest-Rate Cap. An interest-rate cap is a limitation on the amount that the ARM interest rate can increase. There are two types of interest-rate caps: periodic caps, which limit the interest-rate increase from one adjustment interval to the next; and overall caps, which limit the interest-rate increase over the life of the loan. For example, on a one-year ARM with a periodic cap of 2% and an overall cap of 5%, an initial interest rate of 10.5% could increase to a maximum of 12.5% for the second year and 15.5% over the life of the loan.
Payment Cap. A payment cap is a limitation on the amount that the monthly payment can increase at each adjustment interval. The most common payment cap is 7½% per year. For example, on a one-year ARM with a payment cap of 7½%, an initial payment of $1,000 per month could increase to a maximum of$1,075 for the second year, $1,155.63 for the third year, and so on. Because most ARMs with payment caps do not have interest-rate caps, it is possible that the maximum monthly payment on a payment-capped ARM may not cover all of the interest owed on the loan. This shortage, called “deferred interest” or “negative amortization,” is added to the loan balance. As a result, the loan balance may be higher than the original loan amount. Most ARMs contain a cap on negative amortization limiting the loan balance to a maximum of 125% of the original loan amount.
Convertibility. Most ARMs contain a conversion clause that permits the borrower at designated times to convert the ARM to a fixed-rate loan at the then-current market rate for fixed rate loans.
Assumability. Most ARMs are assumable, provided that the new buyer meets the lender’s credit and underwriting criteria. On the other hand, few fixed-rate loans are assumable these days.
Graduated payments. A graduated payment adjustable rate mortgage (“GPARM”) combines the features of an ARM with a monthly payment schedule that starts out lower, then increases gradually over the early years of the loan, typically one to five years. A GPARM does involve negative amortization during the graduated payment period.
Buydowns. A buydown simply involves prepaid interest collected at closing to lower the monthly payment. Buydowns often are paid by the seller to enable the buyer to qualify for the loan. Buydowns may be permanent or temporary. A common program is the “3-2-1” buydown, in which the monthly payment is based on a “payment rate” below the actual note rate by 3% during the first year, 2% the second year, and 1% the third year. A buydown does not involve negative amortization.
Lenders generally charge lower initial interest rates for ARMs than for fixed-rate loans. Lower interest rates mean lower monthly payments, and therefore, more house for the buyer. On the other hand, borrowers assume the risk that interest rates may increase. If interest rates remain steady or decline, an ARM could be significantly less expensive than a fixed-rate loan.
A meaningful comparison of the various loans available should take into consideration all the features discussed above in light of the needs of the individual buyer. Shopping for a loan used to be a relatively simple process; it now is a complicated maze to most buyers.

This article contains general information only, and should not be used or relied upon as a substitute for competent legal advice in specific situations.

Douglas S. Tingvall

Attorney at Law

12015 93rd PL NE

Kirkland, WA 98034-2701

425-821-2701/Fax 896-0390





About Christa

Resume’ Christa Sasser Distinctive Properties, Inc. Obtained Real Estate License in August of 1979 and the Broker’s License in January of 1985. • Broker / Owner of Distinctive Properties since 1994. • Graduate of the Real Estate Institute (GRI) • Certified Residential Specialist (CRS) • Certified Real Estate Brokerage Manager (CRB) • Accredited REO Agent (A*REO) • Certified Sort Sale, Foreclosure, Recourse. (SFR) Real Estate Activities: Locally: Tri-City Association of Realtors. • 1992 and 2001 Realtor of the Year. • 1991 Elected to President of the Tri-City Association of Realtors. • 1990 Served as Vice-President. • 1989 Embraced the office of Secretary -Treasurer • 1985 to 1994 Elected to the Board of Directors. • 1989 to 1994 Earned a place on the Honor Society • 2012 CRB (Certified Residential Broker) President for WA Chapter. • Chaired: Member Services, Nominations, Awards, Long Range Planning, Budget and Finance, Communications, Education, Grievance. Co-Chaired: Most or all of the Committees. Served on: Activities, Budget & Finance, Long Range Planning, Member Services, Awards, Education, Nominating. Grievance, By-Laws. MLS Committee (Some more than one term, consecutively or at different times.) Washington Association of Realtors On the Board of Directors from 1989 to 2004 and 2010 -2012 • 2004 Recipient of the EDDY AWARD • Chairperson & Vice Chair: MLS Forum. Education Forum. Served on: • Operational Planning Committee, Nominations Committee, License Law Subcommittee, Strategic Planning, Communication, Education Forum, Education Steering, MLS Forum, Budget & Finance, Forms, Nominating, Several Core committees. Business Practices Core Committee. Business Practices Core Committee through 2009. Member of Legislative Steering Committee through 2012. Taxation. (Some more than one term, consecutively or at different times.) • *2014- Received the Larry Miller Award for Excellence in Real Estate. State of Washington: 1993 Appointed by the Governor to the Real Estate Commission. • 1996-2003 Re-appointed to the Real Estate Commission for a 6-year term. • 1997 Vice Chair of the Commission • 1998 -2003 Chair of the Education Subcommittee • 1999- 2003 Honorary Trustee for the Washington Center of Real Estate Research. WSU • 2008-:Present School Administrator for Distinctive Real Estate School. • 2008- Present Certified Real Estate Instructor Community: • VITA- Volunteer Income Tax Assistance for 10 years. • Mid-Columbia Symphony Guild • German Club. • Pasco Police Auxiliary Volunteer 1969-1974 • President of the Pasco Police Auxiliary. • Toastmasters • Board Member, Canyon Lakes Homeowners Association • Member of St. Joe's Parish Finance Committee Real Estate Education: • Graduate of the Real Estate Institute (GRI) 1984 • Certified Residential Specialist (CRS) 1994 • Certified Residential Broker (CRB) 2005 • Appraisal MAI Courses. • Additional Courses successfully completed: Finance of Real Estate, Real Estate Law, Successful Practices, Real Estate Management Training, Investment Analysis, Advanced Investment Analysis, Relocation, Legal Aspect of New Construction, Hot@ Legal Issues, Negotiating, How to Deal with Builders, Real Estate Agents Rights & Responsibilities. GRI 400, Broker Management. Risk Reduction Institute Courses: Agent Guide to Agency, Avoiding Misrepresentation, Fair Housing in the 90's, Avoiding Anti-Trust Violations, Agency, Ethics, Does it Pencil? (Investment Analysis) Accredited REO classes. Sort Sale, Foreclosure classes. & more. • Certified as an Instructor from the Department of Licensing in the following fields: o Use of computers and/or other technologies as applied to the practice of Real Estate. o Real Estate Sales & Marketing. Real Estate Practices. Real Estate Law. Real Estate Fundamentals. o Real Estate Closings Practices. Principles & Essentials. Legal Aspects. Ethics & Standards of Practices o Current Trends & Issues. Cross Cultural Communication. Consumer Protection. Business Management. o Brokerage Management and Advanced Management Practices.
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