Io And Poa Disclosure Booklet2

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Info
Interest-Only Mortgage Payments and Payment-Option ARMs

3. OMore Mortgage Info
wning a home is part of the American
dream. But high home prices may make the
What is an I-O mortgage
payment?
dream seem out of reach. To make monthly Traditional mortgages require that each
mortgage payments more affordable, many month you pay back some of the money you
lenders offer home loans that allow you to () borrowed (the principal) plus the interest on
pay only the interest on the loan during the that money. The principal you owe on your
first few years of the loan term or () make mortgage decreases over the term of the loan.
only a specified minimum payment that could In contrast, an I-O payment plan allows you to
be less than the monthly interest on the loan. pay only the interest for a specified number
of years. After that, you must repay both the
Whether you are buying a house or principal and the interest.
refinancing your mortgage, this information
can help you decide if an interest-only Most mortgages that offer an I-O payment
mortgage payment (an I-O mortgage)—or plan have adjustable interest rates, which
an adjustable-rate mortgage (ARM) with means that the interest rate and monthly
the option to make a minimum payment (a payment will change over the term of the loan.
payment-option ARM)—is right for you. Lenders The changes may be as often as once a month
have a variety of names for these loans, but or as seldom as every to 5 years, depending
keep in mind that with I-O mortgages and on the terms of your loan. For example, a 5/
payment-option ARMs, you could face ARM has a fixed interest rate for the first 5
years; after that, the rate can change once a
payment shock. Your payments may go year (the “” in 5/) during the rest of the loan.
up a lot—as much as double or triple— More information on ARMs is available in the
after the interest-only period or when the Federal Reserve Board’s Consumer Handbook
payments adjust. on Adjustable Rate Mortgages.
In addition, with payment-option ARMs you The I-O payment period is typically between
could face and 0 years. After that, your monthly
negative amortization. Your payments may payment will increase—even if interest rates
not cover all of the interest owed. The stay the same—because you must pay back the
unpaid interest is added to your mortgage principal as well as the interest. For example,
balance so that you owe more on your if you take out a 0-year mortgage loan with a
mortgage than you originally borrowed. 5-year I-O payment period, you can pay only
interest for 5 years and then both principal and
Be sure you understand the loan terms and the
interest over the next 5 years. Because you
risks you face. And be realistic about whether
begin to pay back the principal, your payments
you can handle future payment increases. If
increase after year 5.
you’re not comfortable with these risks, ask
about another loan product.
Interest-Only Mortgage Payments and Payment-Option ARMs Interest-Only Mortgage Payments and Payment-Option ARMs

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What is a payment-option ARM?
A payment-option ARM is an adjustable-rate
mortgage that allows you to choose among
even if interest rates rise more than 7.5%. Any
interest you don’t pay because of the payment
cap will be added to the balance of your loan.
several payment options each month. The Payment-option ARMs have a built-in
options typically include recalculation period, usually every 5 years. At
this point, your payment will be recalculated
a traditional payment of principal and (lenders use the term recast) based on the
interest (which reduces the amount you remaining term of the loan. If you have a
owe on your mortgage). These payments 0-year loan and you are at the end of year
may be based on a set loan term, such as 5, your payment will be recalculated for the
a 5-, 0-, or 0-year payment schedule. remaining 5 years. The payment cap does
an interest-only payment (which does not not apply to this adjustment. If your loan
change the amount you owe on your balance has increased, or if interest rates have
mortgage). risen faster than your payments, your payments
could go up a lot.
a minimum (or limited) payment (which
may be less than the amount of interest Ending the option payments. Lenders end the
due that month and may not pay down option payments if the amount of principal
any principal). If you choose this option, you owe grows beyond a set limit, say 0%
the amount of any interest you do not or 5% of your original mortgage amount.
pay will be added to the principal of the For example, suppose you made minimum
loan, increasing the amount you owe and payments on your $80,000 mortgage and
increasing the interest you will pay. had negative amortization. If the balance grew
to $5,000 (5% of $80,000), the option
Interest rates. The interest rate on a payment-
payments would end. Your loan would be
option ARM is typically very low for the
recalculated and you would pay back principal
first to months (%, for example). After
and interest based on the remaining term of
that, the rate usually rises to a rate closer to
your loan. It is likely that your payments would
that of other mortgage loans. Your monthly
go up significantly.
payments during the first year are based on
the initial low rate, meaning that if you only
make the minimum payment, it may not cover
What do you need to ask when
the interest due. The unpaid interest is added shopping for an I-O mortgage or
to the amount you owe on the mortgage, a payment-option ARM?
resulting in a higher balance. This is known as Use the Mortgage Shopping Worksheet to
negative amortization. Also, as interest rates go compare different loan products. Ask lenders
up, your payments are likely to go up. or brokers about the details of their loans and
Payment changes. Many payment-option about the different loan options they offer.
ARMs limit, or cap, the amount the monthly And don’t be afraid to make lenders and
minimum payment may increase from year to brokers compete with each other by letting
year. For example, if your loan has a payment them know you are shopping for the best deal.
cap of 7.5%, your monthly payment won’t Look for a mortgage that allows you to buy the
increase more than 7.5% from one year to the house and continue to afford the payments,
next (for example, from $,000 to $,075), even if payments go up over time.
Interest-Only Mortgage Payments and Payment-Option ARMs Interest-Only Mortgage Payments and Payment-Option ARMs 5

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Mortgage Shopping Worksheet
See the Consumer Handbook on Adjustable
Rate Mortgages to help you compare other ARM
Mortgage Shopping Worksheet
- continued
Example
features and Looking for the Best Mortgage to What is the payment cap? 7.5% per year; does not apply to
help you compare other loan features. recalculation every 5th year
Can this loan have negative Yes
Example amortization?
Name of lender or broker ABC Mortgage Co. Is there a limit to how much Up to 125% of original
contact information 800-123-4567 the balance can grow before amount borrowed (loan will be
Mortgage amount $180,000 the loan will be recalculated? recalculated if balance grows to
$225,000)
Loan description Payment-option ARM; 1-month
Is there a prepayment Yes
introductory rate; 30-year term
penalty if I end this mortgage
Is this an I-O payment or a Payment-option ARM early by refinancing or selling
payment-option ARM? my home?
If different payment options 1. First year’s minimum payment How much is the penalty? 3% of amount borrowed in
are available, what are the based on initial interest rate 1st year ($5,400), down to
options? 1% of amount borrowed in 3rd
2. Interest-only payment based
year ($1,800); no prepayment
on rate after adjustment
penalty after year 3
3. Fully amortizing payment $630
What will my monthly
based on 30-year term
payments be for the first year
What is the full term of the 30 years of the loan?
mortgage?
Does this include taxes and No
How long is the option The loan will be recalculated insurance? Homeowner’s
period? (recast) every 5 years. Payment association fees?
options are available every
month except (1) when loan is What is the most my $677 (based on 7.5% cap)
recast every 5 years, (2) when minimum monthly payment
balance is 125% of original loan, could be after 12 months?
or (3) if you fall more than 60 $728 (based on 7.5% cap)
What is the most my
days behind in your payments.
minimum monthly payment
What is the initial interest 1.6% could be after 24 months?
rate? $738 (based on 7.5% cap)
What is the most my
For a payment-option ARM, 1 month minimum monthly payment
how long does the initial could be after 36 months?
interest rate apply? $2,491 (based on recalculation
What is the most my
What will the interest rate be 6.4% minimum monthly payment of the loan when balance is
after the initial rate? could be after 48 months? $225,000)
How often can the interest Monthly What is the most my $2,491 (based on recalculation
rate adjust? minimum monthly payment of the loan after 4 years)
could be after 60 months
What is the periodic interest 2% per year
(5 years)?
rate cap?
What would my minimum $1,308 (based on recalculation
What is the overall interest 6% lifetime cap (maximum of the loan after 5 years)
monthly payment be after
rate cap? interest rate is 12.4%)
60 months (5 years) if the
How often will the monthly Annually interest rate stays the same?
payments adjust? What are the fees and See good faith estimate
charges due at closing on
this loan?
Interest-Only Mortgage Payments and Payment-Option ARMs Interest-Only Mortgage Payments and Payment-Option ARMs 7

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When might an I-O mortgage
payment or a payment-option
ARM be right for you?
payment could jump to $,0 or more. If you
cannot reasonably expect to make this larger
payment when the time comes, you might
want to think about a different type of loan.
Despite the risks of these loans, an I-O
mortgage payment or a payment-option ARM
might be right for you if the following apply: Mortgage Shopping Worksheet
you have modest current income but are Use this worksheet to compare mortgages.
reasonably certain that your income will
go up in the future (for example, if you’re Mortgage Mortgage
finishing your degree or training program), Name of lender or broker
contact information
you have sizable equity in your home and
Mortgage amount
will use the money that would go toward
principal payments for other investments, Loan description
or
Is this an I-O payment or a
you have irregular income (such as payment-option ARM?
commissions or seasonal earnings) and If different payment options are
want the flexibility of making I-O or available, what are the options?
option-ARM minimum payments during What is the full term of the
low-income periods and larger payments mortgage?
during higher-income periods. How long is the option period?
What is the initial interest rate?
When might an I-O mortgage
payment or a payment-option For a payment-option ARM,
how long does the initial
ARM not make sense? interest rate apply?
Interest-only or option-ARM minimum What will the interest rate be
after the initial rate?
payments may be risky if you won’t be able
How often can the interest rate
to afford the higher monthly payments in the adjust?
future. For example, suppose you are in the
What is the periodic interest
market for a home and can afford a monthly rate cap?
payment of about $,00. Depending on
What is the overall interest rate
the interest rate, with a traditional 0-year, cap?
fixed-rate mortgage, you might expect to get
How often will the monthly
a $80,000 mortgage. A lender or broker payments adjust?
could offer you an I-O mortgage payment of What is the payment cap?
$,00 monthly that might enable you to get
a $5,000 mortgage—and, therefore, a more Can this loan have negative
amortization?
expensive house. But keep in mind that your
payments could go up because of interest rate Is there a limit to how much
the balance can grow before
increases when the I-O period ends, or when the loan will be recalculated?
the loan is recalculated. Your $,00 monthly
8 Interest-Only Mortgage Payments and Payment-Option ARMs Interest-Only Mortgage Payments and Payment-Option ARMs

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Mortgage Shopping Worksheet
- continued
What are the alternatives to I-O
mortgage payments and payment-
option ARMs?
Mortgage Mortgage
If you are not sure that an I-O mortgage
Is there a prepayment penalty if
I end this mortgage early payment or a payment-option ARM makes
by refinancing or selling my sense for you, there are several other
home? alternatives you could consider.
How much is the penalty?
Find out if you qualify for a community
What will my monthly housing program that offers lower
payments be for the first year interest rates or reduced fees for first-time
of the loan?
homebuyers, making homeownership
Does this include taxes and more affordable.
insurance? Homeowner’s
association fees? Consider a fixed-rate mortgage or a fully
What is the most my minimum amortizing ARM. Shop around for terms
monthly payment could be and features that fit your needs and your
after 12 months?
budget.
What is the most my minimum
monthly payment could be Take more time to save for a larger down
after 24 months? payment, reducing the amount you need
What is the most my minimum to borrow and making your mortgage
monthly payment could be payments more affordable.
after 36 months?
What is the most my minimum Look for a less expensive home. Once you
monthly payment could be build up equity, you could buy a more
after 48 months? expensive home.
What is the most my minimum
monthly payment could be
after 60 months (5 years)?
What should I keep in mind when it
What would my minimum
comes to an I-O mortgage payment
monthly payment be after 60 or a payment-option ARM?
months (5 years) if the interest
rate stays the same? Both types of loans can be flexible
What are the fees and charges and allow you to make lower monthly
due at closing on this loan? payments during the first few years of
the loan. You can repay some of the
principal at any time to help keep future
payments lower.
Neither loan may be the right choice if
the attraction of an initial smaller monthly
payment leads you to take out a larger
mortgage than you will be able to afford
when the interest-only period ends or when
the option payments are recalculated.
0 Interest-Only Mortgage Payments and Payment-Option ARMs Interest-Only Mortgage Payments and Payment-Option ARMs

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Eventually you will have to pay back the
principal you borrowed, plus any amounts
added to the principal as negative
amortization.
Glossary
Adjustable-rate mortgage (ARM)
A mortgage that does not have a fixed interest
rate. The rate changes during the life of the
You will have lower monthly payments loan in line with movements in an index rate,
only during the first few years. You will such as the rate for Treasury securities or the
have larger payments later—and you will Cost of Funds for SAIF-insured institutions.
need to have the income to cover those
larger payments. Amortizing loan
Monthly payments are large enough to pay
Also, note that
the interest and reduce the principal on
with an adjustable-rate mortgage, interest- your mortgage.
only and option-ARM monthly payments
Cap, interest rate
can increase, even during the I-O payment
or option period. A limit on the amount your interest rate can
increase. Interest caps come in two versions:
by making I-O or minimum payments, you
will not be building equity in your home periodic caps, which limit the interest-rate
by paying down the principal on the loan, increase from one adjustment period to
even though you are making monthly the next, and
payments. The equity in your home may overall caps, which limit the interest-
increase if the market value of your home rate increase over the life of the loan.
increases, but the equity could also go By law, virtually all ARMs must have an
down if the market value of your home overall cap.
goes down.
Cap, payment
with payment-option ARMs, you may be
A limit on how much the monthly payment
adding to the amount you owe on your may change, either each time the payment
mortgage if you pay less than the full changes or during the life of the mortgage.
interest owed each month. Payment caps do not limit the amount of
interest the lender is earning, so they may
lead to negative amortization.
Equity
The difference between the fair market value
of the home and the outstanding mortgage
balance.
Good faith estimate
The Real Estate Settlement Procedures Act
(RESPA) requires your mortgage lender to give
you a good faith estimate of all your closing
costs within business days of submitting
your application for a loan, whether you are
purchasing or refinancing a home. The actual
Interest-Only Mortgage Payments and Payment-Option ARMs Interest-Only Mortgage Payments and Payment-Option ARMs

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expenses at closing may be somewhat different
from the good faith estimate.
Index
For More Information
Additional information about interest-only
mortgages and payment-option ARMs is
The index is the measure of interest-rate available on the Federal Reserve Board’s
changes that the lender uses to decide how web site at www.federalreserve.gov/pubs/
much the interest rate on an ARM will change mortgage_interestonly/default.htm.
over time. No one can be sure when an index
rate will go up or down. Some index rates tend See also these sites:
to be higher than others, and some change Looking for the Best Mortgage – Shop, Compare,
more often. You should ask your lender how Negotiate (at www.federalreserve.gov/pubs/
the index for any ARM you are considering has mortgage/mortb_.htm)
changed in recent years, and where the index
is reported. Consumer Handbook on Adjustable Rate
Mortgages (at www.federalreserve.gov/pubs/
Interest arms/arms_english.htm)
The price paid for borrowing money, usually A Consumer’s Guide to Mortgage Settlement
given in percentages and as an annual rate. Costs (at www.federalreserve.gov/pubs/
settlement/default.htm)
Margin
Partners Online Mortgage Calculator
The number of percentage points the lender
(at www.frbatlanta.org/partnerssoftwareonline/
adds to the index rate to calculate the ARM
dsp_main.cfm)
interest rate at each adjustment.
Negative amortization This information was prepared in
Occurs when the monthly payments do not consultation with the following
cover all the interest owed. The interest that is agencies and organizations:
not paid in the monthly payment is added to
the loan balance. This means that even after Center for Responsible Lending
making many payments, you could owe more Consumer Federation of America
than you did at the beginning of the loan. Consumer Mortgage Coalition
Prepayment penalty Consumers Union
Extra fees that may be due if you pay off the Credit Union National Association
loan early by refinancing your home. These Federal Deposit Insurance Corporation
fees may make it too expensive to get out of Federal Reserve Bank of New York
the loan. If your loan includes a prepayment Federal Trade Commission
penalty, be aware of the penalty you would Financial Services Roundtable
have to pay. Ask the lender if you can get a
Freddie Mac
loan without a prepayment penalty, and what
that loan would cost. National Consumers League
Office of the Comptroller of the Currency
Principal Office of Thrift Supervision
The amount of money borrowed or the amount Rutgers Cooperative Extension
still owed on a loan. University of Illinois Cooperative Extension
Interest-Only Mortgage Payments and Payment-Option ARMs Interest-Only Mortgage Payments and Payment-Option ARMs 5

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Document authored by: Board of Governors of the
Federal Reserve System, Washington, DC 055.
October 00
Item 4394 (1006) Greatland Corporation • To Order Call 800.530.9393 • www.greatland.com