| I 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.
II Changes in Rate and Payments
A. 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 |
B. 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
|
C. 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
|
D. 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 | | 