Mortgage Glossary - All About ARM's
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Lifetime Payment Cap
For an ARM, a limit on the amount that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap
For an ARM, a limit on the amount that the interest rate can increase or decrease over the life of the mortgage.
Margin
The difference between the interest rate and the index on an adjustable rate mortgage (ARM). The margin remains stable over the life of the loan. It is the index that moves up and down.
Mortgage Program
A bundle of characteristics of a mortgage including whether it is an FRM, ARM, or Balloon, the term, the initial rate period on an ARM, whether it is FHA-insured or VA-guaranteed, and if is not FHA or VA whether it is "conforming" (eligible for purchase by Fannie Mae of Freddie Mac) or "non-conforming".
Negative Amortization
Some ARMs allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called "deferred interest." The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.
Negative Amortization Cap
The maximum amount of negative amortization permitted on an ARM, usually expressed as a percentage of the original loan amount (e.g., 110%). Reaching the cap triggers an automatic increase in the payment, usually to the fully amortizing payment level, overriding any payment increase cap.
No-Change Scenario
The assumption that the value of the index to which the rate on an ARM is tied does not change from its initial level.
One-Year Adjustable Mortgage
Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.
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