Option ARM Loan Glossary
Due to their complex nature, we decided to give Option ARM loans their own glossary to help keep the terms and concepts associated with option arm loans clear. If you have any questions about your Option ARM loan, as in figuring our when your Recast Point is, please contact us and we will be happy to show you in a printed report what you can expect with regards to your loan balance and payment options.
Freedom Point
The moment in time when a property owner's assets exceed their debts. Traditionally, this has been accomplished when the property owner paid off their home...most refer to this as owning their home or other real estate "free and clear". For many, this may or may not be the most fiscally advantageous position contrary to popular belief.
Fully Indexed Rate
Also called the Effective Interest Rate, this is the sum of the current index rate plus the margin. Both of these are spelled out clearly on the loan note and typically are shown on monthly statements from the lender.Index
An indicator that is typically measured by an economic variable at at certain period of time. Common Option ARM indicies are the MTA, 6 Month LIBOR and COFI (11th District Cost of Funds).
Lifetime Cap
The amount that the interest rate is allowed to increase (over the initial note rate) during the term of the loan.
Margin
The amount added to the index rate on an Adjustable Rate Mortgage (ARM) to determine the note rate (the interest rate charged) each time the loan adjusts. Generally, the margin remains constant over the life of the loan.
Maturity
The period of time over which the loan balance must be paid in full.
Maximum Loan Balance or Negative Amortization Cap (Neg Am Cap)
The maximum amount that the lender will allow the loan amount to increast to over the life of the loan. This is typically given as a percentage of the original loan amount (110% or 115% in most cases).
Negative Amortization
When monthly payments are not large enough to pay the interest due the difference is added to the principal balance (the amount owed to the lender). In other words, the borrwer can end up owing more to the lender than they did when they started provided they do not make AT LEAST the interest only payment each month.
Pay Rate
The interest rate used to calculate the mortgatge payment. Typical pay rates are in the 1% to 3% range and are calculated as a fully amortized loan payment.
Payment Cap
The limitation on increases or decreases in the payment. The payment cap is usually 7.5% annually.
Recast Point
The date when a borrower with an Option ARM has their minimum monthly payment significantly increased because their principal balance has reached the Negative Amortization Cap or Maximum Loan Balance. Many times at the Recast Point can cause the client's payment to increase by as much as 80% to 120%. This is known as payment shock.
Start Rate
Also known as a Teaser Rate, the initial interest rate charged on a loan. This rate typically lasts from one to three months.
Stop Period
Tyipcally, the period in which the lender will no longer allow a payment other than the fully amortized payment.
Term
The period that is used to calculate the montly mortgage payment. Ther term is usually the same as the maturity.