CHAPTER 6 A Glossary of Mortgage Terms
Ability to Repay The ability-to-repay rule is the reasonable and good faith determination most mortgage lenders are required to make that you are able to pay back the loan. Under the rule, lenders must generally find out, consider, and document a borrower’s income, assets, employment, credit history and monthly expenses. Lenders cannot just use an introductory or “teaser” rate to determine if a borrower can repay a loan. For example, if a mortgage has a low interest rate that goes up in later years, the lender has to make a reasonable effort to determine if the borrower can pay the higher interest rate too. Adjustable Rate Mortgage An ARM is subject to change at specified intervals. So, an ARM (which amortizes over 30 years) can have a fixed-rate period for 3, 5, 7 or 10 years. After the fixed period is over the rate is reviewed and adjusted every six months. The rate can go up or down within a specified cap range. This is specific to each note. The interest rate for ARMs is a combination of a margin (fixed percentage for the life of the loan) added to an economic index, such as The Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. SOFR is subject to change every day and is posted in the Wall Street Journal. There is a minimum and maximum rate assigned to the loan so that the highest and the lowest rate for the life of the loan is written into your note.
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