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Special section Mortgage reset

Adjustable rate mortgages have a language of their own. Anyone who has one should learn these terms.

Glossary

10 must-know ARM, reset terms
 

5. Introductory rate. Often called a teaser rate. The low rate charged by a lender for an initial period. After the introductory period is over, the rate charged increases to the indexed rate or the stated interest rate.

6. Margin. Expressed as percentage points, the amount that a lender adds to an index to arrive at the final interest rate. For example, if the index is 9 percent and the margin 2.75 percent, the final interest rate is 11.75 percent.

7. Rate adjustment. The act, by a lender, of changing the rate charged on an adjustable-rate loan. The loan contract specifies when the rate adjustment is made. The new rate is the combination of the index and a margin, subject to a periodic cap.

8. Reset. When an adjustable mortgage adjusts, its interest rate -- and the payment that the homeowner makes -- is reset. The first reset in a rising interest rate environment can often be large, causing the homeowner's monthly payment to jump sharply.

9. Recast. In negative-amortizing mortgages (such as pay-option ARMs), the process of adjusting the monthly payments so the balance will be fully repaid over a specified period. A typical pay-option ARM is recast on its fifth anniversary. At that point, the monthly payments rise so that the mortgage will be paid off in 25 years (30 years after the loan was taken out). Pay-option ARMs are recast automatically if the loan balance exceeds a limit, often 110 percent of the original loan amount. For example, if a homeowner borrowed $100,000 in a pay-option ARM and made minimum payments for several years, the loan balance would grow every month until it hit the recast trigger of $110,000. At that point, the monthly payments would increase so that the loan would be paid off on its 30-year anniversary.

10. Recast trigger. In negative-amortizing mortgages (such as pay-option ARMs), an event that causes the monthly payments to fully amortize the loan. A typical pay-option ARM has two recast triggers -- one based on time, and the other based on the loan balance. Most pay-option ARMs recast upon the loan's fifth anniversary. At that point, the monthly payments rise so that the mortgage will be paid off in 25 years (30 years after the loan was taken out). Pay-option ARMs also automatically recast if the loan balance exceeds a limit, often 110 percent of the original loan amount. For example, if a homeowner borrowed $100,000 in a pay-option ARM and made minimum payments for several years, the loan balance would grow every month until it hit the recast trigger of $110,000. At that point, the monthly payments would increase so that the loan would be paid off on its 30-year anniversary.

-- Posted: May 29, 2007
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