Sample Rates and Payments

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 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       III 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

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

Search More Info On:

You'll be re-directed to Top-Lenders.com