DEFINITIONS OF TERMS AND PHRASES
Interest Rate Risk: occurs primarily in adjustable rate mortgages (ARMs) when the adjusted rate mortgage can change interest rates without any control or influence from the borrower.
LIBOR: Stands for London InterBank Offered Rate. It is frequently used as a world index to determine interest rates on a variety of loans, including mortgage interest rates.
Variable Interest Rate Mortgage: A mortgage where the interest rate can fluctuate; essentially an adjustable rate mortgage.
Interest Rates and Bank Interest Rates: The mathematical percentage of the amount borrowed that is added to the principle amount to determine the payment size.
Interest Rate Mortgages: Sometimes used to describe an interest only loan where an introductory low interest rate, or current interest rates are used to calculate the interest only payment for the initial limited period of the loan.
Prime Interest Rates: Those interest rates given to the most creditworthy customers.
Stuck in an ARM or stuck in an adjustable rate mortgage: Occurs when a lender will not refinance because the loan is more than the home value in the ARM, also known as an underwater ARM.
Denied a loan modification of an ARM or denied a loan modification of an adjustable rate mortgage: Loan modification programs were introduced by the Obama Administration where lenders were encouraged to reduce interest rates and/or principle amounts to make homes more affordable. The program has produced disappointing results, with many applicants denied their loan modification applications.
Reduce financial risk in an ARM: Occurs when the effects of rising interest rates are eliminated or minimized. Sophisticated borrowers have learned to shift interest rate risk away from them to another willing party. This borrower knows how to control or lock in interest rate risk.
Interest Rate Increases: Occur when ARMs reset, or have adjusting interest rates in a rising interest rate market.
Adjustable Rate Promissory Note: The document that the borrower and lender are bound by, and contains the terms and conditions of the loan including the introductory fixed rate, the adjustable rate mortgage index and margin, and any adjustable rate mortgage caps or limits.
5/1 ARM or a 3/1 ARM: Two common ARMs, where the first number represents the amount of years the introductory interest rate is fixed, and the second number represents how frequently, in years, the interest rate resets (changes) after the introductory period has expired.
How to get to a fixed rate mortgage from an ARM: At one point in time, a borrower could approach the lender and request the interest rate to be fixed at then current rates. This was known as recasting. Those days appear to be gone now, as most, if not all, lenders now require a full refinance application, as if you were a stranger to the lender. Now, converting to a fixed rate from an adjustable rate mortgage involves the full application process to your chosen lender, who commonly charges thousands of dollars in closing costs.
The Real Question
The real question becomes; why are untrained borrowers allowed to enter in to adjustable rate mortgages? Surely those in high government regulatory positions must have thought that someday there may be a problem if the housing market dips, and all those adjustable rate mortgages come due, and there is no way to refinance them! Think of the speculative position these borrowers are in now: many took out mortgages in the hundreds of thousands of dollars with no protection in place from volatile interest rate movements. The borrower must be trained that they do have alternatives. We have developed the system to do the training. We are helping borrowers avoid trouble, rather than offering assistance when they are already in trouble, which is the government's approach. We hope you purchase the program and educate yourself, for the benefit of you and your family.