Can anyone break this 5/1 CMT ARM for me?

[joestay]

       5/1 CMT ARM

Rate

APR

Points

Margin

Caps

Index

Est. Pymt. /$1,000

3.500

3.23%

0.000

2.750

2/2/5

0.284

$4.49

The cap is 2% initial, 2% yearly, and 5% for the interest rate cap.  Based on this, what would be the highest interest rate possible?  What would be my highest payment possible?  

[Lel]

Loan balance?  Can't calculate your highest possible payment without knowing your loan balance.

After the initial five year fixed rate period, your new interest rate will be based on the Constant Maturity Treasury Index.  This comes in a couple different flavors, but for a 5/1 ARM I assume that it is using the 1 year CMT.

In the 6th year of the loan, the highest rate that it can go to is 3.5% + 2% = 5.5%.  This what the first "2" of your caps mean.  After that, the interest rate cannot rise or fall by more than 2% (the second "2").  The highest rate that you could experience is 3.5% + 5% = 8.5% (the "5").  You wouldn't be at risk of hitting that high rate until after your 7th year of the loan, since the other caps will keep it from getting that high in years 6 and 7.

Your new interest rate each year will be calculated by adding the margin (2.75%) to the CMT, which is currently 0.29%.  In order for your rate to go to 8.5%, the CMT would have to hit 5.75%, a level that has not been seen in about 10 years.  But if inflation becomes an issue - and eventually, it could very well be - then higher interest rates will become the norm.

[joestay]

Loan about 250k

So, based on this, what's the likely increase in rate be?  Also, I thought the max interest rate here was 3.5 + 5 + 2.75 = 10.75%.  So, it's actually 8.5%?

[Lel]

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@joestay wrote:

Loan about 250k

So, based on this, what's the likely increase in rate be?  Also, I thought the max interest rate here was 3.5 + 5 + 2.75 = 10.75%.  So, it's actually 8.5%?

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I don't know what the "likely" increase in interest rate will be.  It depends on the economy.  But here's the worst-case scenario for a loan of $250,000, assuming maximum adjustments for the in years 6, 7, and 8 and full amortization over 30 years.

Years 1-5, 3.5% interest rate, monthly P&I = $1122.61

Year 6, 5.5% interest rate, monthly P&I = $1377.05

Year 7, 7.5% interest rate, monthly P&I = $1648.71

Year 8+, 8.5% interest rate, monthly P&I = $1788.81

And yes, the maximum interest rate is 8.5%.  The margin tells you how the subsequent interest rates will be determined.  The lender takes the index (the 1-year CMT, presumably) and adds the margin (2.75%) to come up with your new interest rate.

ETA: calculations above were done using a spreadsheet, not an online mortgage calculator.  Don't know the source of this spreadsheet, but in my experience it has been very accurate.  You should double check any calculations here, just to be safe.

[joestay]

Why is there two different interest rate than?   There's the interest rate you listed in the table and the interest rate based on CMT.  

Are you saying that after the first 5 years, 5.5% is the max the interest rate from the CMT can be?  Then, year 7, the max interest rate (2.75% + CMT index) can be 7.5%?

[Lel]

To which rates are you referring?  Your interest rate vs the APR (the latter is meaningless when it comes to ARMs), or the index, or the margin rate?

Okay, here's how this ARM works

1. You have a starting interest rate of 3.5%.  It will be fixed for 5 years.

2. Starting in year six, the ARM will start to adjust.  It will adjust every year for the life of the loan.

3. The new interest rate is going to be calculated by adding your margin rate (2.75%) to the value of the 1-year Constant Maturity Treasury Index (your index).

4. The CMT index rate is variable.  That's what makes an ARM adjust.  You have been quoted the current value of the CMT, but this has no bearing on your starting interest rate.  You can look up the history of the CMT on the internet.

5. If at the start of year 6 the CMT is 1.25%, your new interest rate will be the CMT index + margin = 1.25% + 2.75% = 4%.

6. If at the start of year 6 the CMT is 15%, your interest rate will be 5.5%.  Why?  Because the change in interest rate at your first adjustment is capped at 2%.  Thus, your interest rate at first adjustment cannot exceed 3.5% + 2% cap = 5.5%.

7. If at the start of year 7 the CMT is 20%, your interest rate will be 7.5%, because the change in interest rate at each subsequent adjustment after the first is capped at 2%.  Thus, your interest rate would be 5.5% (your year 6 interest rate) + 2% cap = 7.5%.

8. If at the start of year 8 the CMT plummets to 0.5%, your interest will NOT be 0.5% (the index) + 2.75% (margin) = 3.25%.  Why?  Because your interest rate cannot adjust up OR down by more than 2%.  Since your interest rate was previously 7.5% (according to the scenario laid out above), then your rate would drop to 5.5% (i.e. it went down by the 2% adjustment cap).

9. The maximum interest possible on your loan, regardless of how high the CMT goes, is 8.5%.  This is calculated by taking your starting interest rate (3.5%) and adding the maximum interest rate cap (5%) = 8.5%.

[MarineVietVet]

Thank you Lel for detailing that.

It reminds me once again why I have a fixed rate mortgage. 

From a BK years ago to:
EX - 9/09 pulled by lender 802, EQ - 10/10-813, TU - 10/10-774

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

[joestay]

Thanks Lel.  That was most helpful.  I understand it perfectly now.

You should sticky your post.