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A favorable
feature offered with Adjustable Rate Mortgage Loan Programs is the "Fixed"
interest rate option for the first 1,3, 5 or, in some cases, 7 years. This means the
borrower can ask that the interest rate on the loan be "fixed" for the first
1,3,5 or 7 years and then revert to the "adjustable" interest rate for the
remainder of the life of the loan. This feature would be used if the borrower feels that
interest rate are going to rise over the next 1,3,5 or 7 years and he or she wants to
"lock in" a fixed rate during that period. The adjustment period would then
become annually at the end of the "fixed" rate period.
Here are some examples of the "Fixed" interest rate option:
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| 1/1 Program: |
Interest Rate is "Fixed" for
the First 1 Year and then adjusts each Year. The First 1 Year can often have a very low
intro interest rate that is lower than current market interest rate. |
| 3/1 Program: |
Interest Rate is "Fixed" for
the First 3 Years and then adjusts each Year. |
| 5/1 Program: |
Interest Rate is "Fixed" for
the First 5 Years and then adjusts each Year. |
| 7/1 Program: |
Interest Rate is "Fixed" for
the First 7 Years and then adjusts each Year (This option is not always available). |
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Examples of how the "Fixed" interest rate option works during up interest rate
markets.
5/1 Program Sample:
|
Year |
5/1 "Fixed" Interest Rate on
the Loan for the first 5 Years |
Current Market Interest Rates (on 30
Year Fixed Rate Mortgage) |
Comments |
Yr 1 |
5% |
5% |
Interest rates during the first year
of the mortgage are around 5% for a 30 year "Fixed Rate" Mortgage Loan. 5/1
Program is also offered at 5% for the first 5 years. |
Yr 2 |
5% |
6% |
During year #2, interest rates rise
about 1% so that the "Fixed Rate" on the 30 year Mortgage Loan is 6%. However,
the 5/1 Program still has a 5% interest rate since it is fixed at 5% for the first 5 years
of the loan. |
Yr 3 |
5% |
7% |
During year #3, interest rates rise
another 1% so that the "Fixed Rate" on the 30 year Mortgage Loan is 7%. However,
the 5/1 Program still has a 5% interest rate since it is fixed at 5% for the first 5 years
of the loan. |
Yr 4 |
5% |
8% |
During year #4, interest rates rise
another 1% so that the "Fixed Rate" on the 30 year Mortgage Loan is 8%. However,
the 5/1 Program still has a 5% interest rate since it is fixed at 5% for the first 5 years
of the loan. |
Yr 5 |
5% |
9% |
During year #5, interest rates rise
another 1% so that the "Fixed Rate" on the 30 year Mortgage Loan is 9%. However,
the 5/1 Program still has a 5% interest rate since it is fixed at 5% for the first 5 years
of the loan. |
Yr 6 |
5.5% |
9% |
During year #6, interest rates remain
steady so that the "Fixed Rate" on the 30 year Mortgage Loan is 9%. The
"Fixed" interest rate period on the 5/1 Program is now over so that the interest
rate now "adjusts" to current interest rates based on the "Index" of
the loan + the "Margin" Since the "Index" is usually a 1 year Treasury
Bill, the rate could be up about 2% from year #1. That means that the interest rate on the
5/1 needs to "adjust" upward by 2% points. If the 1 year Treasury Bill was 1.5%
on year #1 when this loan was originated and the "Margin" on this loan is 2%,
then the new interest rate for year #6 would be the current Treasury Bill of 3.5%
(remember we said that the Treasury Bill rate was up 2% points by year #6, so the current
T-Bill rate for 1 year is 3.5%), + the 2% "Margin" bringing the total interest
rate to 5.5%. |
Yr 7 |
6.5% |
10% |
During year #7, interest rates rise
another 1% so that the "Fixed Rate" on the 30 year Mortgage Loan is 10%. If the
1 year T-Bill goes up to 4.5%, then the interest rate for the 5/1 Program for year #7
would be 4.5% + 2% "Margin" for a total rate of 6.5%. |
Yr 8-30 |
The interest rate will adjust each
year based on the "Index" + the "Margin" until the end of the loan.
Because almost all Adjustable Rate Mortgages have "Caps" that limit the amount
of change that the interest rate can rise or fall at each "adjustment" period,
the rates in our examples above may be too high...if the "Cap" limits the
increase in year #6 or #7. Because every lender has different "Caps" on their
loans, we did not try to bring that element into our example. |
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As you can see from this example, the borrower who uses the 5/1 Option on their Adjustable
Rate Mortgage Loan will be protected for the first 5 years of the loan if interest rates
go up. Then, at the end of the "Fixed" rate period, the interest rate adjusts to
current interest rates on the "Index" the loan uses + the "Margin" the
loan uses. If interest rates drop during the first 5 years of the loan, the borrower is
locked in at the "Fixed" rate and does not benefit from the reduction in rates.
The benefit starts at the end of the "Fixed" period when the interest rate will
"adjust" downward to the current lower rate for year #6. |
For complete details and current interest rates e-mail :
40Year@Mortgage2USA.com
or use our "Visitor Info Request Form".
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