ARM Resetting Soon LIBOR Index

[simon2020]

OK I am sure someone can help me and explain to me in layman terms how to understand my 36 month ARM that will readjust on 5/1/09. I read through my loan documents to review the caps, ceiling rates, etc.

Type of Loan:

36 ARM, Fixed at 7.125%
First adjustment - 5/1/09
Index: 6-Month LIBOR
MARGIN: 6.75
6-Month Rate Cap: 1.5
Initial rate change: Index (6-month LIBOR) + 1.5 = 7.125 + 1.5 = 8.525% on 5/1/09
Maxium Ceiling: 7 = No higher than initial rate (7.15% +7) = "I know - ouch!" 14.15%

Anyway, now that you have my basics out of the way, I need to understand how the 6- Month Libor rates will affect me at least within the next 12 months. Since the FED lowered the rates to 0-.25% (cool!) I have been tracking the 6-Month Libor rates and it has come down dramatically since the 10/2008 financial bailout came through in November. And, yes, I know, no one is a pyschic, but based on current financial conditions, the FED is projecting keeping rates low for awhile. I looked at the history of the Libor and from 2002- through about the summer of 2004, the 6-month libor fluctuated between a low of 1.16 to the low 2's.

This is what I know (and after speaking with a loan servicer rep. at Countrywide):

1. Come 5/1/09 - my rate will adjust to 8.625% (again, that is 7.12 + 1.5 - my first adjustment cap.)

2. Come 11/1/09 - 6 months later - it will readjust again to the rules noted above "no more or no less" than 1.5 + the 6-month Libor. And so on and so on - readjust 5/1/10, 11/1/10, etc.

ALRIGHTY, HERE ARE MY QUESTIONS THAT I COULD NEVER GET A FULL 100% FROM ANYONE.

QUESTIONS:

1. I pretty much understand my rate WILL go up 1.5 over the current 7.125% on 5/1/09 - that is clear to me.

Today's 6 Month Libor is at a low of 1.864.

Question: Is it possible that my first rate change could be lower if the Libor continued to go lower?

Let's say - just for arguments sake, the Libor hits 1.25 on 4/1/09. Would my loan company calculate 6.75 (My margin) + 1.25 (INDEX) = 8.00% ****Wouldn't my rate change from 7.125 to 8.00 instead of 8.625% on 5/1/09??? OR is the bank saying NO, your first adjustment stands at 1.5 so we are still changing your rate to the higher - 8.625% no matter what LIBOR says at that time??

2. Question regarding the 11/1/09 rate change:

OK, now since my 6-month adjustment cap is NO MORE OR NO LESS than 1.5, does that mean if the Libor is then 2.00, what would my rate be? 6.75 + 2.00 = 8.75%???

OR will the bank add ANOTHER 1.5 to the 5/1/09 rate of 8.625% - which would = 10.15%???!

But since the bank says I cannot have my rates GO HIGHER OR LOWER than 1.5 - I am confused about this because if LIBOR stays low for let's say the next 18 months, will the bank keep it within the 1.5 or will they keep jacking up my rate until it hits the ceiling? Shocked I just don't understand the NO MORE OR NO LESS than 1.5 adjustment cap thing.

[fltoo]

Well, the good news is that your index is based on LIBOR which is good when rates go down as in this economy.

I could make a stab at this, but it is truly much better if your lender will explain this to you in plain English. Why aren't they able to do this?

If the person who answers the phone can't explain it to you, ask for the manager. Sometimes brokers don't really understand margins and indexes themselves since they just plug numbers into a computer these days and call themselves mortgage originators.

BTW, did they offer you to pay a point to lower the margin originally, or did they just quote you the margin and not even tell you it could have been lowered?

More predatory lending mess.

[simon2020]

Well, the good news is that your index is based on LIBOR which is good when rates go down.

Firstly, tell me where you are getting the extra 1.5% on your first adjustment.

Index plus 1.5, you are confusing me with the added 1.5, maybe I am not reading it correctly.

Initial rate change: Index (6-month LIBOR) + 1.5 = 7.125 + 1.5 = 8.525% on 5/1/09

Oops! I meant my "current" fixed (since 3/06) has been 7.125% on 4/1/09, Countrywide sent me a letter saying my rate "could" possibly go up to 8.62%. I say could because my spread is 6.75% + the 6 month libor index. AND they said when it resets, it will go NO HIGHER than 1.50 (and thereafter every 6 months) or NO LOWER than 1.50.

I checked the current 6 month libor and it's like 1.55. Does that mean I will be paying on a 8.30% (6.75 + 1.55) OR since they said I HAVE to pay 1.5 + my current 7.13 rate I still have to pay 8.62%???

This whole libor sh*t really gets to me.

[fltoo]

Ok, I figured out what you were saying and edited my question to you out.

[simon2020]

BTW, did they offer you to pay a point to lower the margin originally, or did they just quote you the margin and not even tell you it could have been lowered?

More predatory lending mess.
Last edited by fltoo; Today at 06:25 PM..

Yes, I did pay some points back in Feb. 2006 when I refinanced the house. I think it was a pt or pt and a half.

So do you think with libor rates being so low, I still have to pay the 8.62%?

[fltoo]

You will be paying the index (LIBOR) plus the margin, which is capped out at 1.5% per adjustment period. I believe the 6.75% margin is the absolute highest it can go for the life of the loan. (They can keep charging you 1.5% every six months until the total hits 6.75%)

Call those freaks and demand an explanation. LOL

[simon2020]

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Well, actually, I am capped at 14.25% so I guess it's 6.75 + whatever the libor rate is every 6 months until it reaches the 14.25 max.

[Trixie007]

Okay, I tried to answer this by quoting your question, but it was too confusing. Let me try it this way and hopefully I'll catch all your questions.

First off - your note, as you said, is 6.75% + LIBOR. Your rate can't change more than 1.5% in either direction in any one adjustment period. The tricky part is to remember that for the 1.5% cap, you are always looking at your current rate and looking at 6.75% + LIBOR.

So... Yes, if LIBOR is lower, your rate could go lower - let's pretend LIBOR is at .25% when your loan adjusts - your new rate will be 6.75% + .25% = 7% --this meets the test as it only adjusted downward by .125%

or, with the numbers in your 1st example: current rate 7.125%, LIBOR = 1.25% = your rate of 6.75% +1.25% = 8%

Next question: no, they cannot say that the 1.5% stands for the first rate adjustment regardless of what LIBOR does unless that is written in the terms of your note

Regarding the 11/09 changes question: Let's pretend that the 1.5% flat rate change for the first adjustment period (May) is not in your current note, using the above example
May LIBOR 1.25%: current rate 7.125%, new rate is 6.75% +1.25% = 8%
Nov LIBOR 4%: current rate 8%, new rate is 6.75% + 4% =10.75% which exceeds the 1.5% cap, so your new rate would be 8% + 1.5% =9.5%

OR if LIBOR goes down,
Nov LIBOR 1%: current rate 8%, new rate 6.75% + 1% = 7.75%

The only way you could ever hit the ceiling on your rate is if LIBOR ever rose to 7.375%, ie 7.125% + 7% caps it at 14.125%,
so... LIBOR of 7.375% = 6.75% + 7.375%= 14.125

And just btw, shame on the loan officer who put you in this loan without making you take a quiz showing that you fully understood how it works!!!

p.s. I don't do this for a living anymore, but if you can't get clear answers from your lender and want to black out all personal info and fax me the rate/adjustment portion of your note, pm me

[fltoo]

ITA Trix, shame on the loan officer and those even now that cannot give him direct answers.

I would be calling every day screaming and yelling until I got someone who knew how to help me!

[Trixie007]

Well, the customer service reps at the lending institution very likely do not understand how the loans actually work! Think of our young people today who can't count change without a calculator/cash register and multiply the complexity by about a hundred... but the LO certainly should understand it!

[HHM]

Why do you even care, those rates are so above market now, that even a 7% rate is crap? You should just bail on the note unless you have more than 15% positive equity in your home. As much as you are trying to understand the math of it, you overlooked the basic issue, is the rate you are paying even worht it...the answer is no.

[simon2020]

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Uh - HHM, why should I bail? I'm not, thanks for asking because this is a 2nd home that has been in the family for years.

((By the way, you responded to my other thread above "second homes/vacation homes)))

And you'll find out I have about $100,000 equity in that home, so no, I am not going to bail out.

[StartingOver08]

Are you going to modify the loan - because this is a second home? I hope so. I hope you can get the lender to get rid of the awful rate during your BK.

[HHM]

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Uh - HHM, why should I bail? I'm not, thanks for asking because this is a 2nd home that has been in the family for years.

((By the way, you responded to my other thread above "second homes/vacation homes)))

And you'll find out I have about $100,000 equity in that home, so no, I am not going to bail out.

I am not sure what you are getting all up-ity about, I did say "unless" you have more than 15% equity. As much as you may think you are the center of the universe, we moderators typically do not track the story line of a member across different posts

[simon2020]

I am not sure what you are getting all up-ity about, I did say "unless" you have more than 15% equity. As much as you may think you are the center of the universe, we moderators typically do not track the story line of a member across different posts

HHM - no hard feelings, it's that the way you worded your last reply to me was hit a very sensitive spot. Even my attorney said why don't I just "Dump" the property and get rid of it. Like I said the property has been in the family for a long time and although now I have to take care of it (and want to continue taking care of it) AND I hate the stinking rate I have now which is why I hope the terms can be modified in my ch 13 coming up soon.

And last of all - hope you don't call me the "Center of the Universe" again because I'm here as others to gather information and that is the last thing I need from a moderator as "cool" as you.