ADJUSTABLE RATE MORTGAGES (ARMs)
An ARM is a mortgage in which the interest rate is adjusted periodically, usually annually, based on a preselected index. Also sometimes known as the variable rate mortgage. Cove Federal Credit Union currently offers adjustable rate mortgages with fixed rate periods of 5 or 7 years that adjust annually after the fixed period. (5/1 ARM and 7/1 ARM)
HOW YOUR INTEREST RATE AND PAYMENT ARE DETERMINED
Your interest rate will be tied to an index rate plus a margin (if a margin was set at the time your loan was closed). Although the index rate may change from time to time, a margin will remain fixed through the term of the loan. Your payment will also be tied to the interest rate, the loan balance, and the remaining term, and other provisions of your loan documents. Please ask us about our current interest rates and margins. The “index” is the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board through the Federal Reserve Bank of St. Louis (FRED). Index values are published by the Federal Reserve Bank of St. Louis, located on the web at https://fred.stlouisfed.org/release/tables?rid=18&eid=290. The initial rate is not based on the index used to make later adjustments. If your initial interest rate is a “discounted” interest rate, at the first interest rate adjustment your rate may increase evew3n if the index remains the same or decreases. If the initial interest rate is above the fully indexed rate, then it will be a “premium” interest rate. If your initial interest rate is a “premium” interest rate, at the first interest rate adjustment on your rate may decrease even if the index remains the same or increases. Your interest rate may change. Each time your interest rate changes, the new interest rate will equal the sum of the index plus the margin, subject to the following limits. Ask us for the current amount of our adjustable rate mortgage discounts or premiums.
HOW YOUR INTEREST RATE CAN CHANGE
After the first 60 (5/1 ARM) months or 84 (7/1 ARM) months of the loan, as applicable, the adjustable interest rate applied to the outstanding balance may change; it may then change every 12 month(s) thereafter. Each date on which the interest rate can change is called “Change Date” and will be described in the loan documents.
Beginning with the first Change Date, the adjustable interest rate will be based on the index described above. Before each Change Date the new interest rate will be calculated by adding a margin (if any) to the current value of the index, rounded up or down to the nearest 0.125%. Subject to the limits described below, this rounded amount will be the new interest rate until the next Change Date.
These loans have a maximum and minimum interest rate. These maximum and minimum rates are determined by the initial interest rate, the lifetime cap(s) and perhaps a ceiling and floor independent of those variables. For example, the floor rate may be different than the starting rate minus the lifetime cap(s).
On the first Change Date, the interest rate cannot increase or decrease more than 2.000%. Based on an initial interest rate of 3.750%, on the First Change Date the interest rate will not be greater than 5.750% or less than 3.00%. Likewise, based on an initial interest rate of 4.125%, on the First Change Date the interest rate will not be greater than 6.125% or less than 3.000%. Thereafter, the adjustable interest rate will never be increased or decreased on any single Change Date by more than 2.000%. Over the term of the loan, the interest rate cannot increase or decrease more than 6.00%. Based on an initial interest rate of 3.750%, the interest rate will never be greater than 9.750% or less than the floor rate of 3.000%. Likewise, based on an initial interest rate of 4.125%, the interest rate will never be greater than 10.125% or less than the floor rate of 3%.
HOW YOUR PAYMENT CAN CHANGE
For the first 60 months of your 5/1 ARM (or the first 84 months of your 7/1ARM), regular payments will be at a constant rate. The interest rate can change every 12 months after the first interest rate change date based on changes in the interest rate. The new payment will be due beginning with the first payment due date after the Change Date on which the related interest rate change occurred and will be the payment until the first payment due date after the next Change Date. The monthly payment can increase or decrease substantially based on annual changes in the interest rate.
The examples below illustrate interest rate and payment changes based on a $10,000, 30-year, fully amortizing loan using initial rates in effect on June 19, 2018 and a Margin of 0.
Example of loans with a Discounted Interest Rate (Below Sum of Index and Margin)
5/1 ARM | 7/1 ARM | |
Initial Interest Rate | 3.750% | 4.125% |
Maximum Interest Rate | 9.750% | 10.125% |
First Year Payment | $46.31 in years 1 – 5 | $48.46 |
Maximum Payment | $79.26 Beginning in year 8 | $79.71 Beginning in year 10 |
To see what your monthly payments would be, divide your mortgage amount by $10,000; then multiply the monthly payment by the resulting amount.
(For Example, the initial monthly payment for a mortgage amount of $60,000 based on the 5/1 ARM program would be calculated as follows: $60,000 divided by $10,000 = 6; 6 times $46.31 = $277.86 per month. The maximum monthly payment would be calculated at 6 times $79.26, or $475.56 per month.
The initial monthly payment for a mortgage amount of $60,000 placed on the 7/1 ARM program would be calculated as follows: $60,000 divided by $10,000 = 6; 6 times $48.46 = $290.76 per month. The maximum monthly payment would be calculated at 6 times $79.71, or $478.26 per month.)
HOW YOU WILL BE NOTIFIED
You will be notified at least 210, but no more than 240 days before the first payment at the adjusted level is due after the initial interest rate adjustment of the loan. This notice will contain information about the adjustment, including the interest rate, payment amount, and loan balance.
You will be notified at least 60, but no more than 120 days before the first payment at the adjusted level is due after any interest rate adjustment resulting in a corresponding payment change. This notice will contain information about the adjustment, including the interest rate, payment amount, and loan balance.
OTHER INFORMATION
These loans do not have a demand feature.