www.hudclips.org
U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000
September 29, 1989
Mortgagee Letter 89-24
TO: ALL APPROVED MORTGAGEES
SUBJECT: Insurance of Adjustable Rate Mortgages on Single Family
Properties Section 251 of the National Housing Act
The purpose of this letter is (1) to advise you of changes to
the Adjustable Rate Mortgage (ARM) Program mandated by the
publication on January 4, 1989, of a final rule at 54 FR 110-111
in the Federal Register; and (2) to provide you with a
comprehensive summary (which will incorporate the most recent
changes) of the major features of the Program, thereby superseding
Mortgagee Letters 84-16, 84-28 , 85-24, 87-31, 88-7, 88-26, and
paragraph 6 on page 2 of 88-2 . The effective date for the
aforementioned rule is March 31, 1989. Notification of this date
was published in the Federal Register on February 28, 1989.
REGULATORY CHANGES
Annual Adjustment Notice to the Mortgagor
Previously, notice of any annual adjustment to the interest
rate and monthly payment, increase or decrease, had to be given to
the mortgagor at least 30 days prior to the change in payment.
The new rule shortens the period for advance notice that a holder
of an ARM must allow when it makes effective any annual
adjustment; specifically, the rule revises 24 CFR 203.49(g) and
234.79(g) to change our annual disclosure requirement from "at
least 30 days" to "at least 25 days" before a monthly payment at
the new level is due. It is important to note that the date on
which the new monthly payment is due is 30 days after the date at
which the interest rate may be changed. The annual disclosure
must be made each year, even if the interest rate or monthly
payment does not change.
This revision will conform HUD's disclosure requirement with
the time frame required by the Federal Reserve Board in their
Truth-in-Lending regulations ("Regulation Z") at 12 CFR
226.20(c).
Existing insured mortgages provide for a 30 day notice. The
new rule does not prohibit notice periods longer than 25 days and
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existing mortgagors have a contract right to the longer notice
period. Thus, mortgagees should honor the terms of existing
mortgages and apply the shorter notice period only if the revised
Adjustable Rate Rider and Adjustable Rate Allonge Amending Note,
Attachment I herein, are used.
Elimination of Carryover
As a result of the final rule published at 54 FR 110-111,
portions of 24 CFR 203.49(e) and 234.79(e) that discuss carryover
are eliminated. The purpose of this is to avoid confusion in the
industry which has been caused by reference to a feature of the
ARM program that has never been adopted in practice since the
program was implemented in 1984. Consequently, with respect to
the magnitude of change in interest rate allowed for an ARM, the
procedure to be followed is simply a continuation of current
practice: No single adjustment to the interest rate can result in
a change in either direction of more than one percentage point
from the interest rate in effect for the period immediately
preceding that adjustment (the "annual cap"); and adjustments in
the effective rate of interest over the entire term of the
mortgage may not result in a change in either direction of more
than five percentage points from the initial contract interest
rate over the term of the mortgage (the "lifetime cap").
Amendments to Adjustable Rate Rider and Adjustable Rate Allonge
Amending Note
As a result of the elimination of carryover, and of the
change in the period of time required to be given to the mortgagor
concerning the annual disclosure, several changes are required in
the Adjustable Rate Rider for new FHA insured adjustable rate
mortgages, and in the Adjustable Rate Allonge Amending Note used
with the Adjustable Rate Notes secured by new FHA insured
adjustable rate mortgages. These changes are reflected at
Attachment I herein, and also in the Notice on Requirements for
Single Family Mortgage Instruments, published at 54 FR 27596 on
June 29, 1989.
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The HUD Adjustable Rate Mortgage Disclosure Statement
(Attachment III) has also been revised.
The revised HUD Adjustable Rate Mortgage Disclosure
Statement may be used immediately and must be used for all
transactions involving sales contracts signed on or after November
1, 1989, unless a disclosure statement meeting criteria of the
Federal Reserve Board's Truth-in-Lending regulations ("Regulation
Z") is used (see discussion under "Loan Disclosure at
Origination"). The revised Rider and Allonge may be used
immediately and must be used for all transactions involving sales
contracts signed on or after November 1, 1989. If the revised
Rider and Allonge are used and the old HUD Adjustable Rate
Mortgage Disclosure Statement was provided, the revised HUD
Adjustable Rate Mortgage Disclosure Statement should be provided
to the mortgagor at or before closing with an explanation that it
supersedes the previous Disclosure Statement.
MAJOR FEATURES OF THE HUD ARM PROGRAM
Legislative History
The Housing and Urban-Rural Recovery Act of 1983 (HURRA)
added Section 251 to the National Housing Act authorizing HUD to
insure adjustable rate mortgages (ARMs) on single family
properties. The program became effective July 30, 1984.
Eligible Sections, Borrowers, and Properties
ARM loans originated under Sections 203(b), 203(k) (first
lien only) and 234(c) are eligible for mortgage insurance. Direct
Endorsement lenders may originate loans under Sections 203(b) and
234(c) only. The ARM program is limited to owner-occupants.
Investors are not eligible.
One-to-four family units are eligible under the ARM program
as long as one of the units will be occupied by the mortgagor.
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Limited Insurance Authority
Formerly the number of ARMs that HUD could insure was limited
to 10 percent of the total number of endorsements for the previous
fiscal year. The Housing and Community Development Act of 1987
raised this number to the current volume of 30 percent.
As previously stated, ARMs may be processed under Direct
Endorsement. After the mortgage credit analysis has been
completed, but prior to notifying the applicant, the Direct
Endorsement underwriter must contact the HUD Field Office for
approval and to record the application against the ARM allocation
in the Computerized Homes Underwriting Management System (CHUMS).
Determination of Interest Rate
The adjustable rate mortgage initial interest rate shall be
negotiated by the mortgagee and the borrower. Subsequent
adjustments to this interest rate must correspond to changes in
the weekly average yield on United States Treasury Securities
adjusted to a constant maturity of one year.
Weekly average yields are published in the Federal Reserve
Bulletin and are made available by the Federal Reserve Board in
Statistical Release H.15(519). (Example at Attachment II.) This
is a national index, which can be obtained from the Federal
Reserve Board, by requesting to be placed on the mailing list for
receipt of the weekly H.15 publication. The address is:
Publications Services
Mail Stop 138
Board of Governors
Federal Reserve System
Washington, DC 20551
The index is also published regularly in many newspapers,
e.g. Wall Street Journal, USA Today.
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Frequency of Interest Rate Changes
Interest rate adjustments to the ARM loan must occur on an
annual basis, except that the first adjustment must occur no
sooner than 12 months and no later than 18 months from the due
date of the mortgagor's initial monthly payment. This six month
window period is designed to facilitate the pooling of loans for
sale in the secondary market. Subsequent interest rate
adjustments will occur on each anniversary date of the first
adjustment. The date of the interest rate change is called the
"Change Date" by HUD, and the "Interest Adjustment Date" by the
Government National Mortgage Association (GNMA).
Caps on Interest Rate Changes
No single adjustment to the interest rate can result in a
change in either direction of more than one percentage point from
the interest rate in effect for the period immediately preceding
that adjustment (the "annual cap").
Adjustments in the effective rate of interest over the entire
term of the mortgage may not result in a change in either
direction of more than five percentage points from the initial
contract interest rate (the "lifetime cap").
Method of Calculating Interest Rate Adjustments
The mortgagee and the borrower negotiate the initial interest
rate and margin. The margin must be constant for the entire term
of the mortgage. To calculate the annual adjustments to the
initial interest rate:
a. Determine the current index. The proper date to be used
for indexing an interest rate adjustment is stated in
paragraph 3(a) of both the Adjustable Rate Rider and the
Adjustable Rate Allonge Amending Note: "The amount of
the Index will be determined, using the most recently
available figure, thirty (30) days before the Change
Date ('Current Index')."
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The index used, based on the weekly average yield on US
Treasury securities adjusted to a constant maturity of
1 year, must be the one effective on the date thirty
(30) exact days before the Change Date. The Federal
Reserve Board Statistical Release H.15 is published
weekly on Monday, or on Tuesday if Monday is a Federal
holiday, and the index shown on that release is
effective the day it is issued until the H.15 is issued
the next week.
The following are the proper indices to use when the
30th exact day falls on:
(1) A Monday which is a business day. Use the index
rate contained in the H.15 release issued that Monday,
if the 30th exact day prior to a Change Date and the
issue date of an H.15 release both occur on the same
day, i.e., they both occur on a Monday.
(2) A Monday which is a Federal holiday. Use the index
in the H.15 release issued the prior week if the 30th
exact day before the Change Date falls on a Monday which
is a Federal holiday.
(3) A day of the week other than Monday. Use the index
in the H.15 release issued on the Monday of that week
(or issued on Tuesday if that Monday is a Federal
holiday).
For example, for an April 1, 1989 Change Date, 30
exact days before April 1 is Thursday, March 2.
The correct index to use is the one contained in
the H.15 release issued on Monday of that week,
which is February 27 (see Attachment II).
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b. Determine the calculated interest rate. This is the
current index plus the margin (the number of basis
points identified as "margin" in paragraph 3(b) of the
Adjustable Rate Rider and the Adjustable Rate Allonge
Amending Note) rounded to the nearest 1/8th of one
percentage point (0.125 percent).
Since mortgages placed into GNMA pools must be rounded
to the nearest 1/8th of one percent at each Interest
Adjustment Date, the Adjustable Rate Mortgage Rider and
Adjustable Rate Allonge Amending Note comply with GNMA's
requirements. However, item 3 of Attachment I provides
lenders with the necessary modifications to the Rider
and Allonge if the loan will not be placed in a GNMA
pool and the lender does not want to round the interest
rate to the nearest 1/8th of one percent. Rounding is
required unless the Rider and Allonge have been modified
to delete the provision for rounding.
c. Compare the calculated interest rate (index plus margin,
rounded to the nearest 1/8th of one percent) to the
existing interest rate (rate in effect for the preceding
12 months) to determine the new adjusted interest rate
as follows:
(1) If the calculated interest rate is equal to the
existing interest rate, the adjusted interest rate
will not change.
(2) If the calculated interest rate is equal to or less
than one percent (100 basis points) higher or lower
than the existing interest rate, the calculated
interest rate will become the new adjusted interest
rate.
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(3) If the new calculated interest rate is more than
one percent (100 basis points) higher or lower than
the existing interest rate, the new adjusted
interest rate will be limited to one percent higher
or lower than the existing interest rate.
d. In no event may any resulting Adjusted Interest Rate be
more than five percentage (5 percent) points higher or
lower than the initial interest rate at settlement.
e. An Adjusted Interest Rate becomes effective on the
Change Date (the date is specified in paragraph 2 of
both the Rider and Allonge) and thereafter will be
deemed to be the existing interest rate. The new
existing interest rate will remain in effect until the
next Change Date. During the term of the mortgage each
adjustment will be effective on the same date of each
succeeding year.
Computation of the Monthly Installment
If there is a new interest rate on the mortgage as a result
of the above calculations, a new monthly payment must be
determined. The monthly payment attributable to principal and
interest will be calculated by determining the amount that is
necessary to fully amortize the unpaid principal balance during
the remaining term of the mortgage. For this purpose, the unpaid
principal balance shall mean that which would be due on the Change
Date if there had been no default in any payment, but reduced by
the amount of any prepayments to principal. (Accordingly,
mortgagee must credit all eligible prepayments, but must not debit
any delinquency.) Escrow requirements will then be added to
principal and interest to arrive at the new monthly payment.
Since interest is payable on the first day of the month
following the month in which it accrued, the borrower will begin
to pay the new monthly payment 30 days after the Change Date,
provided the borrower is given proper notice as required under the
Annual Disclosure section of this Mortgagee Letter.
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All ARM adjustments affect interest percentages only, no
negative amortization may occur.
Loan Disclosure at Origination
The lender must disclose to the borrower the nature of the
ARM loan at the time of loan application. In order to meet this
requirement, mortgagees may use either the HUD Adjustable Rate
Mortgage Disclosure Statement (Attachment III) or a disclosure
statement that meets the criteria of the Federal Reserve Board's
Truth-in-Lending regulations ("Regulation Z") at 12 CFR Part 226.
(The specific Federal Reserve Board disclosure requirements may be
found in Section 226.19(b).)
If the HUD ARM Disclosure Statement is used, mortgagees may
use the 30 year principal and interest payment factors with the
original mortgage amount to calculate the payments for years 2
through 6.
Annual Disclosure Requirements
There are two basic steps which the mortgagee must take each
year with respect to the interest rate adjustment.
a. Step 1: Make the computation to adjust the interest
rate and the monthly payments. The first adjustment to
the interest rate will become effective on the day
specified in paragraph 2 of the Rider or the Allonge
(Change Date) and thereafter each adjustment will be
effective on the same date of each succeeding year
during the term of the mortgage. (As previously noted,
the date on which the new monthly payment is due is 30
days after the Change Date.)
b. Step 2: Notify the mortgagor of any change in the
interest rate and monthly payment.
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The mortgagee's obligation to compute, adjust the
interest rate, and give notice to the mortgagor on the
prescribed dates, is not affected by delinquencies or
foreclosures so long as the mortgage debt exists. It is
the mortgagee's responsibility to see that its
collection actions continually update the mortgage debt.
Notice of any adjustment to the interest rate and
monthly payment, increase or decrease, must be given to
the mortgagor at least 25 days prior to the change in
payment. (If the mortgage provides for 30 days notice,
that provision must be followed.) Our rule concerning
the timing of the annual notice of adjustment is
consistent with Federal Home Loan Bank Board (FHLBB)
regulations and policy.
The Adjustment Notice must contain (a) the date the
Adjustment Notice is given, (b) the Change Date, (c) the
current interest rate, (d) the new Existing Interest
Rate (which is the Adjusted Interest Rate) as adjusted
on the Change Date, (e) the current Index and the date
it was published, (f) the method of calculating the
adjustment to the monthly payments, (g) the amount of
the adjusted monthly payments, and (h) any other
information which may be required by law from time to
time. The Notice should contain other relevant
information such as an explanation of why a new Existing
Interest Rate is less than the Calculated Interest Rate
when the 5 percent cap is reached.
The content of the annual disclosure notice may meet the
criteria of either 24 CFR 203.49(g) and 234.79(g), or
the criteria of the Federal Reserve Board in Regulation
Z at 12 CFR 226.20(c). The suggested format for
providing the annual disclosure notice which appears at
Attachment IV is designed to comply with HUD
regulations.
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It is suggested that the Notice be sent to the mortgagor
by Certified Mail, Return Receipt Requested. However, a
Notice addressed and mailed via first class mail to all
property owners identified on the mortgagee's records
shall be sufficient unless the mortgagors' whereabouts
are known to be elsewhere. A Notice must be given each
year, even if the interest rate does not change.
For HUD review purposes, lenders must keep evidence that
timely notice has been given, and evidence of the annual
adjustment computations, for the mortgage term. A file
copy of the suggested HUD annual disclosure notice will
be sufficient to satisfy this requirement. However,
should disputes arise as to timely notice or as to the
annual adjustment computations, compliance with our
suggested methods may not satisfy local legal
interpretations of the mortgage provisions in determining
whether the evidence was sufficient. Lenders should,
therefore, be guided by the advice of counsel in matters
concerning the type and duration of record retention.
The mortgagee's collection personnel should be alerted
to the prospect of Notice not being received by the
mortgagor, and should take appropriate remedial action
when necessary. If the mortgagor's payments do not
reflect the increase or decrease recited in the Notice,
a follow-up should be made to assure that the Notice was
received.
Failure to Provide Timely Notice
If the mortgagee fails to provide notice for more than one
year, an Existing Interest Rate must be determined for each
omitted year because the calculations for each year affect the
rate for subsequent years. The one percent and five percent
limitations are applicable each year and must be taken into
consideration in determining the new Existing Interest Rate. The
mortgagee's failure to provide Notice in advance of each Change
Date results in penalties (to be found in the ARM Rider and
Allonge) to the mortgagee.
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Although the interest rate may change, the mortgagee is
prevented from collecting any increase in payments until the
Notice has been provided at least 25 days prior to any new
payments becoming effective (or 30 days, if the mortgage so
provides). If timely notice is not provided, the lender forfeits
its right to collect the increased amount and the borrower is
relieved from the obligation to pay that increase.
In the event that the adjusted rate were to decline, the
failure to provide Notice would result in overpayments until the
mortgage rate was properly adjusted. In such case, the mortgagee
must refund the excess with interest, at a rate equal to the sum
of the Margin and the Index in effect on the Change Date, from the
date of the excess payment to the date of repayment. The borrower
has the option of a cash refund or application of the excess to
the unpaid principal balance of the mortgage, after application of
the refund to any existing delinquency.
Failure to Provide Accurate Notice
If the mortgagee miscalculates the interest rate and/or the
monthly payment, and the error(s) are reflected in the Annual
Notice, HUD takes the position that the errors need to be
corrected. However, HUD takes no position as to whether an
erroneous Notice would constitute a failure to provide notice
under the terms of the mortgage contract. This is a legal matter
subject to local law and court interpretation.
Sales, Assignments and Transfers of Servicing Among Mortgagees
It is the responsibility of the transferor (seller) to
provide the transferee with complete servicing records which
reflect all annual ARM requirements as having been met. Although
HUD regulations require the transferee/assignee to assume all
servicing obligations, we do not intend that a negligent ARM
mortgagee-transferor be permitted to avoid its disclosure
obligations. In the event that a failure of Notice or other error
is discovered, it shall be the responsibility of the mortgagee
transferor who was holding the loan when the failure occurred, to
reimburse the mortgagee currently holding the loan, where any
burden of refund to the mortgagor is required.
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Underwriting and Processing
The ARM loan will be processed and underwritten using the
initial interest rate negotiated between the lender and borrower,
as stated in the Form HUD-92900, Application for Commitment and
Insurance. Mortgage credit processing shall be in accordance with
existing instructions as modified below:
a. An adjustable rate mortgage disclosure statement, signed
by all borrowers, must accompany the Form HUD-92900,
Application for HUD/FHA Insured Mortgage. As previously
stated, mortgagees may use either the HUD Adjustable
Rate Mortgage Disclosure Statement (Attachment III) or a
disclosure statement that meets the criteria of the
Federal Reserve Board's Truth-in-Lending regulations
("Regulation Z"). If the HUD ARM Disclosure Statement
is not used, it is necessary for lenders to provide
borrowers with the standard HUD disclosure statement
concerning the unregulated HUD interest rate and
discount points.
b. Consistent with existing policy, the initial interest
rate of an ARM may increase up to one percentage point
above that shown on the commitment (Direct Endorsement
underwriter approval of the borrower), before
reprocessing is required by HUD (Direct Endorsement
lender).
c. ARMS insured under Section 203(b) are subject to the
one-time mortgage insurance premium. The MIP factors
and the calculations for ARMS are the same as for fixed
rate loans. On ARM loans insured under Section 234(c)
and Section 203(k), the Department will collect the MIP
based on the monthly MIP figures for the initial
interest rate throughout the term of the loan.
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d. See Handbook 4000.4 REV-1, Single Family Direct
Endorsement Program, dated September 1988, to identify
the applicable underwriter certifications.
e. The initial interest rate, the margin, the date of the
first adjustment to the interest rate and the frequency
of adjustments must be specified in the mortgage
documents. Modifications to HUD's mortgage documents
may be found at Attachment I. However, each mortgagee
is responsible for ascertaining whether or not the
provisions contained in the attached documents are
permissible under local and State law. In the event of
any perceived conflict with local or State law, you
should contact the Office of General Counsel, Home
Mortgage Division, HUD Headquarters, to discuss such
potential conflict and for further instructions.
f. For an ARM associated with an interest rate buydown, the
underwriting will be based upon the interest rate before
applying the buydown. The buydown will only be
considered as a compensating factor.
With regard to the caps, they are determined exclusive
of any temporary buydown. The five percent cap is based
on the rate in the mortgage documents. The one percent
annual cap is determined from the existing interest rate
on the loan. It is the mortgagee's responsibility to
explain to the borrower the impact of the buydown on the
borrower's repayment schedule.
If there is a permanent buydown, the underwriting will
be based on the rate in the application.
g. ARMs may not be used with Shared Equity loans.
h. ARMs will be limited to only a 30-year term.
i. This Mortgagee Letter does not apply to Home Equity
Conversion Mortgage ARMs.
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Assumptions
Lenders should encourage sellers to disclose the terms of an
ARM in any sales transaction; however, when an assumption will
take place both the seller and the lender should assume
responsibility for notifying the purchaser (assumptor) about the
conditions of the ARM.
As soon as the lender becomes aware of an assumption and has
the name of the purchaser, he should provide the purchaser with a
copy of the original Disclosure Statement with an explanatory
letter addressing the ARM mortgage conditions. Request for
acknowledgment of the receipt of this information is advisable.
For assumption transactions which require a creditworthiness
review or in cases where a release from personal liability is
requested and approved, the lender must prepare a new Disclosure
Statement to ensure that the purchaser is aware of the ARM
obligation. Processing of the HUD 2210, Request for Credit
Approval of Substitute Mortgagor and/or FHA Form 2210-1, Approval
of Purchaser and Release of Seller, must be based on the existing
interest rate in effect at the time the complete credit review
package is submitted to HUD or to the DE Underwriter.
Statistical Information
To track ARM activity, HUD has established case number suffix
codes (Section of the Act ADP Codes) which should be indicated on
all firm commitment applications (Form HUD-92900) and which are
printed on computer generated mortgage insurance certificates
(Form 59100). There will be different suffix codes for HUD
processed cases, HUD processed cases with VA CRVs and all Direct
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Endorsement cases. The following chart has been prepared to
assist your staff:
Eligible Section of the Section of the Section of the
Program Act Suffix Act Suffix Act Suffix
Code - HUD Code - HUD Code - Direct
Processed Case Processed Case Endorsement
with VA-CRV
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203(b) 229 529 729
203(k) first 230 530 730
lien
234(c) 231 531 731
Definitions
Attachment V incorporates definitions of some of the
principal ARM terms.
If you have any questions concerning this Mortgagee Letter,
you may contact the Single Family Development Division, HUD
Headquarters, (202) 426-7212, regarding ARM origination issues;
or the Single Family Servicing Division, HUD Headquarters, (202)
755-6672 regarding ARM servicing issues.
Sincerely,
C. Austin Fitts
Assistant Secretary for Housing
Federal Housing Commissioner
Attachments
ATTACHMENT I
1. Forms are attached hereto for (a) an Adjustable Rate Rider,
and (b) an Adjustable Rate Allonge Amending Note. These
forms contain all of the provisions necessary to comply with
the National Housing Act and the regulations promulgated in
connection therewith. However, prior to the origination of
any adjustable rate loan under Section 203(b), 203(k) or
234(c), each lender is responsible for ascertaining whether
or not the provisions contained in the attached forms are
permissible under, and are in compliance with, local and
State law. Accordingly, all lenders should have qualified
legal counsel review the attached forms. In the event of any
perceived conflict between the provisions contained in the
attached forms and the requirements of local or State law,
you should contact the Office of General Counsel, Home
Mortgage Division, HUD Headquarters, for further
instructions, prior to the origination of any adjustable rate
mortgage.
2. The following are instructions for MANDATORY modifications to
the existing FHA Note and Mortgage Forms for all States, to
create adjustable rate mortgage documents. If applicable
State law requires that contemporaneously executed Riders or
Allonges be notarized, the appropriate notarization should be
added.
a. Mortgage Instrument
(i) On page one, after the words "with interest at
the rate of _______ per centum (______%) per
annum," and again after the words "in monthly
installments of _______ Dollars ($_____),"
type in the following words: "See Adjustable
Rate Rider."
(ii) Above the final sentence of the document which
is before the signature lines for the
Mortgagors, type in capital letters: "SEE
ADJUSTABLE RATE RIDER ATTACHED HERETO AND MADE
A PART HEREOF FOR ADDITIONAL TERMS, COVENANTS
AND CONDITIONS OF THIS MORTGAGE." (Substitute
"Deed of Trust" or "Security Deed" for the
word "Mortgage", where applicable.)
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Where space limitations prohibit typing the above
sentence as directed, type the sentence in the margin
(or below the signature lines, if necessary) with an
asterisk for identification placed both at the beginning
of the sentence and the location where the sentence
would have been typed if space permitted. (If
necessary, use the same procedure of typing in the
margin and using asterisks, for adding the words "See
Adjustable Rate Rider.")
(iii) Attach the Adjustable Rate Rider, with all
blanks properly completed.
(iv) For loans originated under Section 203(b), be
certain that the mortgage form you use
provides for the one-time mortgage insurance
premium (MIP) payment.
b. Note:
(i) After the words "with interest from date at
the rate of _____ per centum (_____%) per
annum," and again after the words "monthly
installment as follows: _____________ Dollars
($_____)," type in the following words: "See
Adjustable Rate Allonge Amending Note."
(ii) Above the final sentence of the Note which is
before the signature lines for the Borrowers,
type in capital letters: "SEE ADJUSTABLE RATE
ALLONGE AMENDING NOTE ATTACHED HERETO AND MADE
A PART HEREOF FOR ADDITIONAL ITEMS, COVENANTS
AND CONDITIONS OF THIS NOTE, INCLUDING,
WITHOUT LIMITATION, PROVISIONS FOR ADJUSTING
THE INTEREST RATE AND MONTHLY PAYMENTS." At
the mortgagee's discretion, the language
following "HEREOF" may be deleted.
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Where space limitations prohibit typing the
above sentence as directed, type the sentence
in the margin (or below the signatures, if
necessary) with an asterisk for identification
placed both at the beginning of the sentence
and the location where the sentence would have
been typed if space permitted. (If necessary,
use the same procedure, of typing in the
margin and using asterisks, for adding the
words "See Adjustable Rate Allonge Amending
Note.")
(iii) Attach the Adjustable Rate Allonge Amending
Note, will all blanks properly completed.
3. The following are instructions for OPTIONAL modifications to
the Adjustable Rate Rider and Adjustable Rate Allonge
Amending Note (which are attached hereto), to be used if you
do not want to round out the amount of the interest rate
charged to the Borrower. THIS MODIFICATION DOES NOT COMPLY
WITH GNMA REQUIREMENTS AND SHOULD NOT BE MADE TO ANY MORTGAGE
WHICH WILL BE PLACED IN A GNMA POOL.
(a) Adjustable Rate Rider. Delete paragraph 3(b) of the
Adjustable Rate Rider and substitute the following
paragraph in its place:
"(b) _____ percentage points (_____%; the "Margin")
will be added to the Current Index. The sum, of
the Margin plus the Current Index, will be called
the "Calculated Interest Rate" for each Change
Date."
(b) Adjustable Rate Allonge Amending Note. Delete paragraph
3(b) of the Adjustable Rate Allonge Amending Note and
substitute the following paragraph in its place:
"(b) _____ percentage points (_____%; the "Margin")
will be added to the Current Index. The sum, of
the Margin plus the Current Index, will be called
the "Calculated Interest Rate" for each Change
Date."
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For use only with an Adjustable
Rate Mortgage, Deed of Trust or
Security Deed insured under
Section 203(b), 203(k) (first
lien only) or 234(c) of the
National Housing Act.
ADJUSTABLE RATE RIDER
THIS ADJUSTABLE RATE RIDER is made this _____________ day of
_________, 19____, and is incorporated into and shall be deemed to
amend and supplement the Mortgage, Deed of Trust or Security Deed
("Mortgage"), of even date herewith, given by the undersigned
("Mortgagor") to secure Mortgagor's Adjustable Rate Note ("Note"),
of even date herewith, to ________________________________________
("Mortgagee"), covering the premises described in the Mortgage and
located at _______________________________________________________
___________________.
Notwithstanding anything to the contrary set forth in the
Mortgage, Mortgagor and Mortgagee hereby agree to the following:
1. Under the Note, the initial stated interest rate of _____ per
centum (_____%) per annum ("Initial Interest Rate") on the
unpaid principal balance is subject to change, as hereinafter
described. When the interest rate changes, the equal monthly
installments of principal and interest also will be adjusted,
as hereinafter provided, so that each installment will be in
an amount necessary to fully amortize the unpaid principal
balance of the Note, at the new adjusted interest rate, over
the remaining term of the Note.
_____________________________________________________________________
5
2. The first adjustment to the interest rate (if any adjustment
is required) will be effective on the first day of _________,
19__ (which date will not be less than twelve months nor more
than eighteen months from the due date of the first
installment payment under the Note), and thereafter each
adjustment to the interest rate will be made effective on that
day of each succeeding year during the term of the Mortgage
("Change Date").
3. Each adjustment to the interest rate will be made based upon
the following method of employing the weekly average yield on
United States Treasury Securities adjusted to a constant
maturity of one year ("Index"; the Index is published in the
Federal Reserve Bulletin and made available by the United
States Treasury Department in Statistical Release H.15
(519)). As of each Change Date, it will be determined
whether or not an interest rate adjustment must be made, and
the amount of the new adjusted interest rate, if any, as
follows:
(a) The amount of the Index will be determined, using the
most recently available figure, thirty (30) days before
the Change Date ("Current Index").
(b) _____ percentage points (_____%; the "Margin") will be
added to the Current Index and the sum of this addition
will be rounded to the nearest one-eighth of one
percentage point (0.125%). The rounded sum, of the Margin
plus the Current Index, will be called the "Calculated
Interest Rate" for each Change Date.
(c) The Calculated Interest Rate will be compared to the
interest rate being earned immediately prior to the
current Change Date (such interest rate being called the
"Existing Interest Rate"). Then, the new adjusted
interest rate, if any, will be determined as follows:
_____________________________________________________________________
6
(i) If the Calculated Interest Rate is the same as
the Existing Interest Rate, the interest rate
will not change.
(ii) If the difference between the Calculated
Interest Rate and the Existing Interest Rate
is less than or equal to one percentage point,
the new adjusted interest rate will be equal
to the Calculated Interest Rate (subject to
the maximum allowable change over the term of
the Mortgage of five percentage points, in
either direction, from the Initial Interest
Rate, herein called "5% Cap").
(iii) If the Calculated Interest Rate exceeds the
Existing Interest Rate by more than one
percentage point, the new adjusted interest
rate will be equal to one percentage point
higher than the Existing Interest Rate
(subject to the 5% Cap).
(iv) If the Calculated Interest Rate is less than
the Existing Interest Rate by more than one
percentage point, the new adjusted interest
rate will be equal to one percentage point
less than the Existing Interest Rate (subject
to the 5% Cap).
(d) Notwithstanding anything contained in this Adjustable
Rate Rider, in no event will any new adjusted interest
rate be more than five percentage (5%) points higher or
lower than the Initial Interest Rate. If any increase
or decrease in the Existing Interest Rate would cause
the new adjusted interest rate to exceed the 5% cap, the
new adjusted interest rate will be limited to five
percentage (5%) points higher or lower, whichever is
applicable, than the Initial Interest Rate.
_____________________________________________________________________
7
(e) Mortgagee will perform the functions required under
Subparagraphs 3(a), (b) and (c) to determine the amount
of the new adjusted rate, if any. Any such new adjusted
interest rate will become effective on the Change Date
and thereafter will be deemed to be the Existing
Interest Rate. The new Existing Interest Rate will
remain in effect until the next Change Date on which the
interest rate is adjusted.
(f) If the Index is no longer available, Mortgagee will be
required to use any index prescribed by the Department
of Housing and Urban Development. Mortgagee will notify
Mortgagor in writing of any such substitute index
(giving all necessary information for Mortgagor to
obtain such index) and after the date of such notice the
substitute index will be deemed to be the Index
hereunder.
4. (a) If the Existing Interest Rate changes on any Change Date,
Mortgagee will recalculate the monthly installment payments
of principal and interest to determine the amount which would
be necessary to repay in full, on the maturity date, the
unpaid principal balance (which unpaid principal balance will
be deemed to be the amount due on such Change Date assuming
there has been no default in any payment on the Note but that
all prepayments on the Note have been taken into account), at
the new Existing Interest Rate, in equal monthly payments.
At least 25 days before the date on which a monthly payment
at the new level is due, Mortgagee will give Mortgagor
written notice ("Adjustment Notice") of any change in the
Existing Interest Rate and of the revised amount of the
monthly installment payments of principal and interest,
calculated as provided above. Each Adjustment Notice will
set forth (i) the date the Adjustment Notice is given, (ii)
the Change Date, (iii) the current interest rate, (iv) the
new Existing Interest Rate as adjusted on the Change Date,
_____________________________________________________________________
8
(v) the amount of the adjusted monthly installment payments,
calculated as provided above, (vi) the Current Index and the
date it was published, (vii) the method of calculating the
adjustment to the monthly installment payments, and (viii)
any other information which may be required by law from time
to time.
(b) Mortgagor agrees to pay the adjusted monthly installment
amount beginning on the first payment date which occurs at
least twenty-five (25) days after Mortgagee has given the
Adjustment Notice to Mortgagor. Mortgagor will continue to
pay the adjusted monthly installment amount set forth in the
last Adjustment Notice given by Mortgagee to Mortgagor until
the first payment date which occurs at least twenty-five (25)
days after Mortgagee has given a further Adjustment Notice to
Mortgagor. Notwithstanding anything to the contrary
contained in this Adjustable Rate Rider or the Mortgage,
Mortgagor will be relieved of any obligation to pay, and
Mortgagee will have forfeited its right to collect, any
increase in the monthly installment amount (caused by the
recalculation of such amount under Subparagraph 4(a)) for any
payment date occurring less than twenty-five (25) days after
Mortgagee has given the applicable Adjustment Notice to
Mortgagor.
(c) Notwithstanding anything contained in this Adjustable
Rate Rider, in the event that (i) the Existing Interest Rate
was reduced on a Change Date, and (ii) Mortgagee failed to
give the Adjustment Notice when required, and (iii)
Mortgagor, consequently, has made any monthly installment
payments in excess of the amount which would have been set
forth in such adjustment Notice ("Excess Payments"), then
Mortgagor, at Mortgagor's sole option, may either (1) demand
the return from Mortgagee (who for the purposes of this
sentence will be deemed to be the mortgagee, or mortgagees,
who received such Excess Payments, whether or not any such
mortgagee subsequently assigned the Mortgage) of all or any
_____________________________________________________________________
9
portion of such Excess Payments, with interest thereon at a
rate equal to the sum of the Margin and the Index on the
Change Date when the Existing Interest Rate was so reduced,
from the date each such Excess Payment was made by Mortgagor
to repayment, or (2) request that all or any portion of such
Excess Payments, together with all interest thereon
calculated as provided above, be applied as payments against
principal.
5. Nothing contained in this Adjustable Rate Rider will permit
Mortgagee to accomplish an interest rate adjustment through
an increase (or decrease) to the unpaid principal balance.
Changes to the Existing Interest Rate may only be reflected
through adjustment to Mortgagor's monthly installment
payments of principal and interest, as provided for herein.
BY SIGNING BELOW, Mortgagor accepts and agrees to the terms
and covenants contained in this Adjustable Rate Rider.
_________________________ (Seal)
Mortgagor
_________________________ (Seal)
Mortgagor
_____________________________________________________________________
10
For use only with an Adjustable
Rate Note secured by a Mortgage,
Deed of Trust or Security Deed
insured under Section 203(b),
203(k) (first lien only) or
234(c) of the National Housing
Act.
ADJUSTABLE RATE ALLONGE
AMENDING NOTE
THIS ADJUSTABLE RATE ALLONGE is an AMENDMENT made this ____
day of ________, 19____, and is incorporated into and shall be
deemed to amend and supplement the Note ("Note"), of even date
herewith, given by the undersigned ("Borrower") to evidence
Borrower's indebtedness to __________________________________
("Holder"), which indebtedness is secured by that certain
Mortgage, Deed of Trust or Security Agreement ("Mortgage"), of
even date herewith, covering the premises described in the
Mortgage and located at _________________________________.
Notwithstanding anything to the contrary set forth in the
Mortgage, Borrower hereby agrees to the following:
1. The interest rate stated in the Note, of _____ per centum
(_____%) per annum ("Initial Interest Rate"), is subject to
change as hereinafter provided. Borrower promises to pay, on
the unpaid principal amount, interest at the rate in effect
from time to time, as adjusted in accordance with the
provisions of this Amendment, in monthly installments of
principal and interest as provided in Paragraph 4. When the
interest rate changes, the equal monthly installments of
principal and interest also will be adjusted, as hereinafter
provided, so that each installment will be in an amount
necessary to fully amortize the unpaid principal balance of
_____________________________________________________________________
11
the Note, at the new adjusted interest rate, over the
remaining term of the Note. Borrower agrees to pay to the
order of Holder the amount of all such adjusted monthly
installments, provided that Borrower is notified of such
adjustments as hereinafter required.
2. The first adjustment to the interest rate (if any adjustment
is required) will be effective on the first day of _________,
19____ (which date will not be less than twelve months nor
more than eighteen months from the due date of the first
installment payment under the Note), and thereafter each
adjustment to the interest rate will be made effective on
that day of each succeeding year during the term of the
Note ("Change Date").
3. Each adjustment to the interest rate will be made based upon
the following method of employing the weekly average yield on
United States Treasury Securities adjusted to a constant
maturity of one year ("Index"; the Index is published in the
Federal Reserve Bulletin and made available by the United
States Treasury Department in Statistical Release H. 15
(519)). As of each Change Date, it will be determined
whether or not an interest rate adjustment must be made, and
the amount of the new adjusted interest rate, if any, as
follows:
(a) The amount of the Index will be determined, using the
most recently available figure, thirty (30) days before
the Change Date ("Current Index").
(b) ____ percentage points (_____%; the "Margin") will be
added to the Current Index and the sum of this addition
will be rounded to the nearest one-eighth of one
percentage point (0.125%). The rounded sum, of the
Margin plus the Current Index, will be called the
"Calculated Interest Rate" for each Change Date.
(c) The Calculated Interest Rate will be compared to the
interest rate being earned immediately prior to the
current Change Date (such interest rate being called the
"Existing Interest Rate"). Then, the new adjusted
interest rate, if any, will be determined as follows:
_____________________________________________________________________
12
(i) If the Calculated Interest Rate is the same as
the Existing Interest Rate, the interest rate
will not change.
(ii) If the difference between the Calculated
Interest Rate and the Existing Interest Rate
is less than or equal to one percentage point,
the new adjusted interest rate will be equal
to the Calculated Interest Rate (subject to
the maximum allowable change over the term of
the Note of five percentage points, in either
direction, from the Initial Interest Rate,
herein called the "5% cap").
(iii) If the Calculated Interest Rate exceeds the
Existing Interest Rate by more than one
percentage point, the new adjusted interest
rate will be equal to one percentage point
higher than the Existing Interest Rate
(subject to the 5% cap).
(iv) If the Calculated Interest Rate is less than
the Existing Interest Rate by more than one
percentage point, the new adjusted interest
rate will be equal to one percentage point
less than the Existing Rate (subject to the 5%
cap).
(d) Notwithstanding anything contained in this Amendment, in
no event will any new adjusted interest rate be more
than five percentage (5%) points higher or lower than
the Initial Interest Rate. If any increase or decrease
in the Existing Interest Rate would cause the new
adjusted interest rate to exceed the 5% cap, the new
adjusted interest rate will be limited to five
percentage (5%) points higher or lower, whichever is
applicable, than the Initial Interest Rate.
(e) Holder will perform the functions required under
Subparagraphs 3(a), (b) and (c) to determine the amount
of the new adjusted rate, if any. Any such new
adjusted interest rate will become effective on the
Change Date and thereafter will be deemed to be the
Existing Interest Rate. The new Existing Interest Rate
will remain in effect until the next Change Date on
which the interest rate is adjusted.
_____________________________________________________________________
13
(f) If the Index is no longer available, Holder will be
required to use any index prescribed by the Department
of Housing and Urban Development. Holder will notify
Borrower in writing of any such substitute index (giving
all necessary information for Borrower to obtain such
index) and after the date of such notice the substitute
index will be deemed to be the Index hereunder.
4. (a) If the Existing Interest Rate changes on any Change Date,
Holder will recalculate the monthly installment payments of
principal and interest to determine the amount which would be
necessary to repay in full, on the maturity date, the unpaid
principal balance (which unpaid principal balance will be
deemed to be be the amount due on such Change Date assuming
there has been no default in any payment on the Note but that
all prepayments on the Note have been taken into account), at
the new Existing Interest Rate, in equal monthly payments.
At least 25 days before the date on which a monthly payment
at the new level is due, Holder will give Borrower written
notice ("Adjustment Notice") of any change in the Existing
Interest Rate and of the revised amount of the monthly
installment payments of principal and interest, calculated as
provided above. Each Adjustment Notice will set forth (i)
the date the Adjustment Notice is given, (ii) the Change
Date, (iii) the current interest rate, (iv) the new Existing
Interest Rate as adjusted on the Change Date, (v) the amount
of the adjusted monthly installment payments, calculated as
provided above, (vi) the Current Index and the date it was
published, (vii) the method of calculating the adjustment to
the monthly installment payments, and (viii) any other
information which may be required by law from time to time.
(b) Borrower agrees to pay the adjusted monthly installment
amount beginning on the first payment date which occurs at
least twenty-five (25) days after Holder has given the
Adjustment Notice to Borrower. Borrower will continue to pay
_____________________________________________________________________
14
the adjusted monthly installment amount set forth in the last
Adjustment Notice given by Holder to Borrower until the first
payment date which occurs at least twenty-five (25) days
after Holder has given a further Adjustment Notice to
Borrower. Notwithstanding anything to the contrary contained
in this Amendment or the Note, Borrower will be relieved of
any obligation to pay, and Holder will have forfeited its
right to collect, any increase in the monthly installment
amount (caused by the recalculation of such amount under
Subparagraph 4(a)) for any payment date occurring less than
twenty-five (25) days after Holder has given the applicable
Adjustment Notice to Borrower.
(c) Notwithstanding anything contained in this Amendment, in
the event that (i) the Existing Interest Rate was reduced on
a Change Date, and (ii) Holder failed to give the Adjustment
Notice when required, and (iii) Borrower has, consequently,
made any monthly installment payments in excess of the amount
which would have been set forth in such adjustment Notice
("Excess Payments"), then Borrower, at Borrower's sole
option, may either (1) demand the return from Holder (who for
the purposes of this sentence will be deemed to be the
holder, or holders, who received such Excess Payments,
whether or not any such holder subsequently assigned the Note
and Mortgage) of all or any portion of such Excess Payments,
with interest thereon at a rate equal to the sum of the
Margin and the Index on the Change Date when the Existing
Interest Rate was so reduced, from the date each such Excess
Payment was made by Borrower to repayment, or (2) request
that all or any portion of such Excess Payments, together
with all interest thereon calculated as provided above, be
applied as payments against principal.
5. Nothing contained in this Amendment will permit Holder to
accomplish an interest rate adjustment through an increase
(or decrease) to the unpaid principal balance. Changes to
the Existing Interest Rate may only be reflected through
adjustment to Borrower's monthly installment payments of
principal and interest, as provided for herein.
_____________________________________________________________________
15
6. If more than one person has signed the Note and this
Amendment, each person is jointly and severally liable for
all of the obligations under the note as modified by this
Amendment and, therefore, each person is fully and personally
obligated to fulfill all of the promises made in the Note and
this Amendment, including, without limitation, payment of the
entire amount owed (except as provided under Subparagraph
4(b)).
BY SIGNING BELOW, Borrower accepts and agrees to the terms
and covenants contained in this Amendment.
________________________ (Seal) ___
Borrower
________________________ (Seal)
Borrower
ATTACHMENT III
ADJUSTABLE RATE MORTGAGE DISCLOSURE STATEMENT
IMPORTANT MORTGAGE LOAN INFORMATION
PLEASE READ CAREFULLY
You must receive this statement and be given an opportunity
to read it prior to the time you sign the "Borrowers
Certification" on the loan application, Form HUD-92900.1.
ADJUSTABLE RATE MORTGAGE MEANS YOUR PAYMENT MAY CHANGE IN THE
FUTURE
You are applying for an Adjustable Rate Mortgage (ARM) loan.
This means that your interest rate and monthly payments may change
during the life of your loan. Your monthly payments will increase
if the interest rate rises and decrease if it falls. An ARM is
different from a fixed rate mortgage loan. For fixed rate loan,
the monthly payments of principal and interest do not change
during the life of the loan. You should consider carefully which
type of loan is best for you.
ARM LOAN TERMS
There are six important factors in an ARM loan. They are the
initial interest rate, margin, discount points, frequency of rate
adjustment, index used to calculate interest rate adjustments and
caps on interest rate increases. Since all FHA ARM loans have the
same index, caps, and frequency of rate adjustment, you should pay
particular attention to the initial interest rate, margin and
discount points that different lenders charge when shopping for an
ARM loan. These three items are freely negotiable between you and
the lender. In addition, you can negotiate the length of time
before your loan closes during which these terms are guaranteed
not to change. However, lenders sometimes require a commitment
fee for "locking in" loan terms for a designated period (for
example, 30, 60, or 90 days).
_____________________________________________________________________
2
INITIAL INTEREST RATE
This is the interest rate that will be charged for the first
year of your mortgage and may remain in effect from l2 to 18
months, depending on the terms of your particular loan. The
lender must disclose, in the mortgage documents at closing, when
this initial interest rate will change. The date on which the
interest rate changes is the same each year and is called the
Change Date.
After the initial period, the interest rate on your mortgage
may change on the change date every year you have this ARM loan.
However, you must have been given at least 25 days notice before
you must pay any changed amount in your monthly payment. In this
notice, the lender must also tell you the amount of the index and
how your interest rate and monthly payments will be affected.
MARGIN
The margin is a percentage that is added to the current index
to establish the annual interest rate on your ARM. The amount of
the margin will remain constant for the life of the mortgage. The
larger the margin, the more interest you will pay on your loan.
Since the margin affects the interest rate for every year but
the first one, you should make certain that the margin being
charged is reasonable. A slightly lower initial interest rate may
prove more costly to you if a higher margin is being charged than
you can obtain from other lenders.
DISCOUNT POINTS
Discount points are a one time fee charged at closing by the
lender to increase the lender's yield on the loan. Each discount
point is one percent of the loan amount. This fee will be paid by
you unless the seller has agreed (in your written agreement) to
pay all or part of these discount points.
_____________________________________________________________________
3
INDEX
After the first year, the annual changes in the interest rate
charged on your ARM will be tied to the weekly average yield on
United States Treasury Securities adjusted to a constant maturity
of one year (One Year Treasury Constant Maturities). This is a
national index published by the Federal Reserve Board in
Statistical Release H.15(519). You may request to be placed on
the mailing list to receive copies of this weekly publication by
writing:
Publication Services
Mail Stop 138
Board of Governors
Federal Reserve System
Washington, DC 20551
The index is also published regularly in many newspapers,
e.g. Wall Street Journal, USA Today.
CAPS ON INTEREST RATE CHANGES
Your interest rate cannot increase (or decrease) more than
one percentage point per year and cannot increase (or decrease)
more than five percentage points from the initial interest rate on
your loan, no matter how much the index may have moved.
METHOD OF CALCULATING ANNUAL INTEREST RATE ADJUSTMENTS
Each year, on the Change Date, the lender will adjust the
interest rate on your loan. The lender will check the most recent
weekly index available 30 days before the change date and add to
it the amount of the margin (index plus margin equals the
calculated interest rate). Unless your mortgage documents provide
otherwise, the calculated interest rate will be rounded to the
nearest 1/8th percent. The calculated interest rate is compared
to the existing interest rate (the rate you have been paying for
the last year) and subject to the 5 percent cap:
_____________________________________________________________________
4
1) if the two differ by one percent or less the calculated
interest rate will become your new (adjusted) interest
rate;
2) if the calculated interest rate is more than one percent
higher or lower, your new interest rate will be only one
percent higher or lower than the existing interest
rate;
3) if the calculated interest rate is the same as the
existing interest rate, the adjusted interest rate
will not change.
Year Index + Margin = Calculated New Interest
Interest Rate Rate
_________________________________________________________________
1 N/A N/A N/A 10% (initial
interest rate)
2 9.5 2.0 ( 9.5 + 2.0 = 11.5) 11%
3 9.0 2.0 ( 9.0 + 2.0 = 11.0) 11%
4 10.5 2.0 (10.5 + 2.0 = 12.5) 12%
5 8.5 2.0 ( 8.5 + 2.0 = 10.5) 11%
o The lender and borrower in this example agreed to an
initial interest rate of 10 percent for the first year
and that the annual adjustments to the interest rate
will be calculated using the index plus a margin of two
percentage points.
o In year two, the calculated interest rate (index plus
margin) is 11.5 percent. Because this is more than one
percent above the initial interest rate, the new
interest rate is 11 percent.
o In year three, the index decreases .5 percent from 9.5
to 9 and the calculated interest rate is 11 percent.
Therefore, the interest rate remains the same as the
previous year.
_____________________________________________________________________
5
o In year four, the index increases 1.5 percent (from 9 to
10.5) and the calculated interest rate is 12.5 percent.
However, because of the 1 percent ceiling on interest
rate increases, the new interest rate is only 12
percent.
o In year five, the index decreases 2 percent (from 10.5
to 8.5). After adding the margin, the calculated
interest rate is 10.5 percent. However, since the 1
percent limit is also imposed on interest rate
decreases, the new interest rate will return to 11
percent.
REPROCESSING
The wording of your agreement with the lender will determine
the amount, if any, that the interest rate and discount points may
change before closing. HUD requires that your loan be reprocessed
if there is any increase in the discount points you will pay or an
increase of more than one percent in the initial interest rate on
your loan.
If the lender seeks reprocessing, the lender will ask you to
sign a new application. Whether or not you sign is your choice.
However, if you refuse to sign you may lose your deposit. Before
you sign any loan application or agreement, make certain you
understand your rights. If you sign, you would be agreeing to the
higher interest rate and/or discount points shown in your new
application. If, after reprocessing, you remain eligible for the
loan, the conditions of your agreements with the lender and the
seller may require you to complete the transaction at the higher
interest rate, lose your deposit or pay some form of penalty fee.
You should seek professional advice if you do not understand the
agreements you are signing.
_____________________________________________________________________
6
WHAT IS THE MOST YOU MAY HAVE TO PAY
The chart below shows what your monthly payments to principal
and interest would be if your interest rate increases the maximum
permitted amount of one percentage point per year. If your loan
closes at the interest rate shown on your application, lines 1
through 6 show your payment after the annual adjustments.
Beginning with the sixth year, the payments would not increase
again because of the five percentage points ceiling on interest
rate increases. The chart shows the highest amount of principal
and interest you will be required to pay in any year if your loan
closes at the interest rate shown in your application and if the
interest rate increases at the one percent maximum each year.
This highest payment cannot be reached earlier than the sixth
year, but could be reached after then if your interest rate does
not increase as quickly as permitted.
WORST CASE EXAMPLE
Loan Amount: Enter mortgage amount from application
________________________________________________________________
Year Interest Rate Monthly Payment for
No. (percent) Principal and Interest
________________________________________________________________
1
2
3
4
5
6
________________________________________________________________
_____________________________________________________________________
7
TERMS OF YOUR ADJUSTABLE RATE MORTGAGE
Frequency of rate changes: Annually after first adjustment.
First adjustment will occur between 12-18 months after first
payment date.
Maximum interest rate change at one time: One (1) percentage
point.
Maximum interest rate change over life of loan: Five (5)
percentage points from the initial interest rate shown on your
mortgage.
Index: One Year Treasury Constant Maturities.
Index rate for week ending __________ was __________%.
Initial mortgage interest rate:
Margin:
BE CERTAIN THAT YOU UNDERSTAND THIS TRANSACTION. SEEK
PROFESSIONAL ADVICE IF YOU ARE UNCERTAIN.
___________________ Signature
___________________ Signature
Date ______________
ATTACHMENT IV
Suggested Form of Annual Disclosure ARM Notice
Mortgagee Name Date
Address
Telephone No.
Mortgagor(s) Name
Address
Re: Annual Notice of Changes in Interest Rate and Monthly
Installment Payments on Your Adjustable Rate Mortgage
Dear Mortgagor:
On ___ (date) __, the interest rate on your Adjustable Rate
Mortgage (ARM) will (increase/decrease) from ____ % to ____ %, and
your monthly installment payments will (increase/decrease) from
$ ______ to $ _____. Beginning with your __ (date) _____ payment,
please pay the new amount. New payment coupons (or monthly
billings) reflecting the new amount will be sent shortly.
Your present interest rate was based on an Index Value of
____ %. To determine your new interest rate we added the Current
Index Value of _______ % as of ___ (date) ______, to the agreed
upon Margin of ______ % for a total of ______ % (rounded to the
nearest 1/8th percent).
The new Existing Interest Rate of _______ % may not be more
than one percent higher or lower than the prior Existing Interest
Rate of _______ %. The original Interest Rate of your mortgage
was _______ % which may not be increased or decreased beyond five
percent during the life of the mortgage.
The new monthly installment was determined by computing the
monthly payment to principal and interest necessary to pay off the
principal balance of the mortgage ($_________________) over the
remaining term of the mortgage ( __ yrs.) at the new Existing
Interest Rate, without taking into account delinquent payments,
and crediting any prepayments to principal. The required monthly
escrow payment ($ ______ ) was then added to the required
principal and interest payment.
_____________________________________________________________________
2
If you have any questions, please call __________ at the
telephone number listed above, or you may use the toll-free
numbers previously provided.
Sincerely,
NOTE: If the annual ARM Notice is designed to include all the
essential factors for calculation of the new interest
rate and monthly payment, a file copy should be
sufficient to reflect the computation.
ATTACHMENT V
INDEX The weekly average yield on United States
Treasury Securities adjusted to a constant
maturity of one year (published in the Federal
Reserve Bulletin). See Attachment II.
CURRENT INDEX The most recently available Index published 30
exact days before the Change Date.
CHANGE DATE The effective date of an adjustment to the
interest rate. (Called the Interest
Adjustment Date by GNMA). The date is
specified in paragraph 2 of the Adjustable
Rate Rider or the Allonge amending the Note.
(This is not the date on which monthly
payments change.)
MARGIN The agreed number of percentage points added
to the Current Index to determine the
Calculated Interest Rate. The number is
specified in paragraph 3(b) of the Adjustable
Rate Rider or the Allonge Amending the Note,
and remains constant for the life of the
mortgage.
INITIAL INTEREST The interest rate stated in the note which
RATE will be in effect for 12 to 18 months from the
date of the first monthly payment.
CALCULATED The Current Index plus the Margin, rounded to
INTEREST RATE the nearest one-eighth of one percentage point
(0.125%). The Calculated Interest Rate is
used to determine the Adjusted Interest Rate.
ADJUSTED INTEREST The new interest rate effective for the
RATE twelve month period following each Change
Date. (The Adjusted Interest Rate will become
the Existing Interest Rate on the next Change
Date.)
EXISTING INTEREST The interest rate in effect immediately prior
RATE to any adjustment on the current Change Date.