Question for Mortgage or Real Estate People

Water Cooler Investing
#1

I have a question about ARMs (standard amortizing versions) and how the monthly payments are constructed after they reset. Maybe one of you guys understands this.

I’m trying to project out the home equity of homes that may have multiple mortgages and home equity lines of credit (HELOCs) on them. Basically track and forecast out the sums of principal balance on these loans, each of which may be fixed/floating, amortizing or interest only, varied terms, etc.

When an ARM resets, I assume that the new payments are calcuated by amortizing the loan over the remaining months in the contract, just using the new interest rate. So I am just solving for PMT, with PV=(inital loan - principal that’s been paid), FV=0, INT=(new rate/12), and NPER=(remaining months in mortgage term).

That makes sense, and I don’t have an issue with it.

My question is about how it works when there’s been excess principal payments (i.e. the owner is paying down the mortgage faster, or paid down a lump sum of the morgage).

In this case, when the principal has been paid down faster, and the rate resets, is the new payment based on the current principal balance of the mortgage, or is it based on what the principal balance would have been, had there been no excess principal payments.

It’s become a problem in my mind because with fixed rate mortgages, if you make excess principal payments, the amount due doesn’t change if it is an amortizing loan, and does change if it is an interest-only loan. But with amortizing floating rate loans, I think the monthly payment only changes at the reset date.

The answer affects how I link my model cells together, and how I treat excess principal payments, so I’m wondering if there’s any standard here

#2

I think its based on outstanding principal balance.

#3

As I think about it, I can’t imagine how it could be anything else. I could try to read through the fine print of the documents, I guess, but I was hoping there was some standard.

It’s interesting that you can lower your future monthly payment with an ARM (in some cases, even if the interest rate goes up) by paying down the principal in between resets, but you can’t do the same with a fixed rate mortgage.

#4

I took out an ARM in 2012 ,when underwriting for my zip code returned. I didn’t read all the terms, but the dude who did the closing, at a cafe two blocks from me no less, said the payments are based on the remaining balance at reset. A little known benefit of an ARM compared to a fixed. Lowers the cash flow risk of prepayment for the homeowner. Nice feature. Just hearsay on my part though.

#5

As long as that interest rate doesn’t move. Slight moves in interest rate can really impact that cash flow.

#6

outstanding balance for sure

#7

Yep, that would be rate risk. Your payment will still be less than if you had not prepaid even if the payment ends up increasing.

#8

Ahhh ARMs, brings back memories. I was analyzing default risk on these bad boys back in 2002.

#9

anyne take out an arm loan lately, 5 year reset?

#10

^

I did you Ukrainian putz. Lowest rates out there cuz.

#11

I sing of ARMs and The Man.