Sample Rates, Payments and Costs

Scenarios

Adjustable rate mortgages (ARMs) are best analyzed using scenarios. A scenario is an assumption about how interest rates will behave in the future. We use 5 scenarios:

  • No Change means the index used by the ARM does not change over the life of the loan. 
     
  • Small Increase means the index rises by 1/2% a year for 3 years starting after the second year, remaining unchanged after that.
     
  • Moderate Increase means the index rises by .75% a year for 4 years starting after the first year, remaining unchanged after that.
     
  • Large Increase means the index rises by 1% a year for 5 years starting immediately, remaining unchanged after that.
     
  • Worst Case means that the ARM rate increases as much and as fast as the ARM contract allows.  

 The ARM Used For Illustration  

To illustrate the tables, we use a 6-month ARM with the characteristics shown immediately below. 

Characteristics of 6-Month ARM

  ARM Type

6 mo / 6 mo

  Initial Interest Rate on ARM

2.375%

  Most Recent Index Value

1.500%

  Margin

1.250%

  First Rate Adjustment Cap

1.000%

  Later Adjustment Caps

1.000%

  Maximum Interest Rate

9.375%

  Loan Term (in Years)

30

  Interest-Only Period (in years)

5

Other Data Required
  FRM Comparison Rate

6%
  Borrower's Holding Period (in Years): Shortest

3
                    Most Likely

6
                    Longest

9

   

 Interest Rates and Payments on the Basic Loan

  The table below shows rates and payments for the 6-month ARM under the 5 interest rate scenarios.

Interest Rates & Monthly Payments Per $100,000 of Loan

 

No Change

Small Increase

Moderate Increase

Large Increase

Worst Case

Months

ARM Rate

Payment

ARM Rate

Payment

ARM Rate

Payment

ARM Rate

Payment

ARM Rate

Payment

1 - 6

2.38%

388.66

2.38%

388.66

2.38%

388.66

2.38%

388.66

2.38%

388.66

7 - 12

2.75%

407.96

2.75%

407.96

2.75%

407.96

3.25%

434.52

3.38%

441.31

13 - 18

2.75%

407.96

2.75%

407.96

2.75%

407.96

3.75%

461.62

4.38%

496.82

19 - 24

2.75%

407.96

2.75%

407.96

3.13%

427.21

4.25%

489.20

5.38%

554.89

25 - 30

2.75%

407.96

2.75%

407.96

3.50%

446.67

4.75%

517.22

6.38%

615.24

31 - 36

2.75%

407.96

3.00%

420.35

3.88%

466.31

5.25%

545.64

7.38%

677.60

37 - 42

2.75%

407.96

3.25%

432.76

4.25%

486.11

5.75%

574.41

8.38%

741.69

43 - 48

2.75%

407.96

3.50%

445.18

4.63%

506.05

6.25%

603.49

9.38%

807.28

49 - 54

2.75%

407.96

3.75%

457.59

5.00%

526.10

6.75%

632.85

9.38%

807.28

55 - 60

2.75%

407.96

4.00%

469.99

5.38%

546.25

7.25%

662.45

9.38%

807.28

61 - 359

2.75%

407.96

4.25%

482.36

5.75%

566.47

7.75%

692.25

9.38%

807.28

360 - 360

2.75%

404.81

4.25%

481.40

5.75%

563.07

7.75%

689.95

9.38%

799.64

     

Rates and Payments Using Interest-Only Option

  The table below shows rates and payments for the same 6-month ARM but using the interest-only option for 5 years. 

       Interest Rates & Monthly Payments Per $100,000 of Loan 

 

No Change

Small Increase

Moderate Increase

Large Increase

Worst Case

Months

ARM Rate

Payment

ARM Rate

Payment

ARM Rate

Payment

ARM Rate

Payment

ARM Rate

Payment

1 - 6

2.38%

197.92

2.38%

197.92

2.38%

197.92

2.38%

197.92

2.38%

197.92

7 - 12

2.75%

229.17

2.75%

229.17

2.75%

229.17

3.25%

270.83

3.38%

281.25

13 - 18

2.75%

229.17

2.75%

229.17

2.75%

229.17

3.75%

312.50

4.38%

364.58

19 - 24

2.75%

229.17

2.75%

229.17

3.13%

260.42

4.25%

354.17

5.38%

447.92

25 - 30

2.75%

229.17

2.75%

229.17

3.50%

291.67

4.75%

395.83

6.38%

531.25

31 - 36

2.75%

229.17

3.00%

250.00

3.88%

322.92

5.25%

437.50

7.38%

614.58

37 - 42

2.75%

229.17

3.25%

270.83

4.25%

354.17

5.75%

479.17

8.38%

697.92

43 - 48

2.75%

229.17

3.50%

291.67

4.63%

385.42

6.25%

520.83

9.38%

781.25

49 - 54

2.75%

229.17

3.75%

312.50

5.00%

416.67

6.75%

562.50

9.38%

781.25

55 - 60

2.75%

229.17

4.00%

333.33

5.38%

447.92

7.25%

604.17

9.38%

781.25

61 - 359

2.75%

461.32

4.25%

541.74

5.75%

629.11

7.75%

755.33

9.38%

865.03

360 - 360

2.75%

457.40

4.25%

540.93

5.75%

626.65

7.75%

754.33

9.38%

857.18

 

 Rates and Payments Using FRM Payment Option

The table below shows rates and payments for the same 6-month ARM but assuming the borrower makes the FRM payment for as long as it is larger than the ARM payment.

Interest Rates & Monthly Payments Per $100,000 of Loan  

  No Change Small Increase Moderate Increase Large Increase Worst Case
Months ARM Rate Payment ARM Rate Payment ARM Rate Payment ARM Rate Payment ARM Rate Payment
1 - 6 2.38% 599.56 2.38% 599.56 2.38% 599.56 2.38% 599.56 2.38% 599.56
7 - 12 2.75% 599.56 2.75% 599.56 2.75% 599.56 3.25% 599.56 3.38% 599.56
13 - 18 2.75% 599.56 2.75% 599.56 2.75% 599.56 3.75% 599.56 4.38% 599.56
19 - 24 2.75% 599.56 2.75% 599.56 3.13% 599.56 4.25% 599.56 5.38% 599.56
25 - 30 2.75% 599.56 2.75% 599.56 3.50% 599.56 4.75% 599.56 6.38% 599.56
31 - 36 2.75% 599.56 3.00% 599.56 3.88% 599.56 5.25% 599.56 7.38% 654.35
37 - 42 2.75% 599.56 3.25% 599.56 4.25% 599.56 5.75% 599.56 8.38% 716.24
43 - 48 2.75% 599.56 3.50% 599.56 4.63% 599.56 6.25% 599.56 9.38% 779.58
49 - 54 2.75% 599.56 3.75% 599.56 5.00% 599.56 6.75% 599.56 9.38% 779.58
55 - 60 2.75% 599.56 4.00% 599.56 5.38% 599.56 7.25% 623.96 9.38% 779.58
61 - 209 2.75% 599.56 4.25% 599.56 5.75% 599.56 7.75% 652.03 9.38% 779.58
210 2.75% 545.21 4.25% 599.56 5.75% 599.56 7.75% 652.03 9.38% 779.58
211 - 233 2.75% 0.00 4.25% 599.56 5.75% 599.56 7.75% 652.03 9.38% 779.58
234 2.75% 0.00 4.25% 197.94 5.75% 599.56 7.75% 652.03 9.38% 779.58
235 - 276 2.75% 0.00 4.25% 0.00 5.75% 599.56 7.75% 652.03 9.38% 779.58
277 2.75% 0.00 4.25% 0.00 5.75% 76.06 7.75% 652.03 9.38% 779.58
278 - 359 2.75% 0.00 4.25% 0.00 5.75% 0.00 7.75% 652.03 9.38% 779.58
360 2.75% 0.00 4.25% 0.00 5.75% 0.00 7.75% 651.24 9.38% 774.51

 

Cost

    The cost tables show the sum of mortgage payments and interest loss, less the reduction in loan balance, over three periods specified by the user.

 
Net Cost Over 3 Years
 
Net Cost = Total Payments + Interest Loss - Reduction in Loan Balance
ARM No Change Small Increase Moderate Increase Large Increase Worst Case Average
ARM  8,223 8,341 9,303 11,895 14,659 10,484
ARM  with FRM Pmts 8,143 8,253 9,164 11,685 14,400 10,329
ARM with IO Pmts 8,297 8,423 9,435 12,114 14,970 10,648
Fixed Rate Loan 18,309 18,309 18,309 18,309 18,309 18,309

 

Net Cost Over 6 Years
 
Net Cost = Total Payments + Interest Loss - Reduction in Loan Balance
ARM No Change Small Increase Moderate Increase Large Increase Worst Case Average
ARM  16,989 20,106 24,792 32,783 42,614 27,457
ARM with FRM Pmts 16,649 19,411 23,790 31,759 41,623 26,646
ARM with IO Pmts 17,296 20,742 25,789 34,155 44,293 28,455
Fixed Rate Loan 37,222 37,222 37,222 37,222 37,222 37,222

 

Net Cost Over 9 Years
 
Net Cost = Total Payments + Interest Loss - Reduction in Loan Balance
ARM No Change Small Increase Moderate Increase Large Increase Worst Case Average
ARM  26,122 33,355 42,438 56,685 72,093 46,138
ARM with FRM Pmts 25,317 31,478 39,991 54,685 70,332 44,361
ARM with IO Pmts 26,696 34,748 44,595 59,572 75,354 48,193
Fixed Rate Loan 56,671 56,671 56,671 56,671 56,671 56,671
Interest loss is calculated at 2%. Cost does not include upfront charges or mortgage insurance. Average cost weighs each scenario equally.

 Copyright Jack Guttentag 2004