10-1 ARM Loan with Disclosures – Sample Disclosure

Here’s some analysis and a sample disclosure for a 10-1 ARM Loan:

This ad has a really big 3.250% Interest rate. That’s low right? But wait, doesn’t Regulation Z require the APR to be same size font and appearance as the interest rate?

How’s the disclosure on this advertisement? Lets look at the back side:

The disclaimer is pretty good: It has the rate available as of date (August 1, 2014), has the necessary FICO score, indicates that the loan is an ARM and that the payment is subject to change, says max LTV and CLTV, indicates that ad is for no cash out refi, owner occupied, and shows how and when the payment can/will change:

APR is Annual Percentage Rate and is current as of August 1, 2014. Rate based on 10/1 ARM, with no more than 70% LTV and CLTV. $749 origination fee less a $300 savings. Third party fees such as title, appraisal, etc. may still apply. Advertised rate of 3.250% is conditioned upon you having credit score of at least 740 at the time of loan approval …

And here’s the Terms of the Payment required disclosure that Regulation Z says we have to do on an ARM Loan:

On a $150,000, 10-1 ARM amortized over 3o years with an initial interest rate of 3.250% with an APR of 3.165%, after fixed-period of 10 years the rate may increase annually; individual adjustments are capped at 3% first, 2% subsequent, , and rate can never increase by more than the lifetime cap of 5%. A payment example would be as follows based on a fullly capped interest rate over the life of the loan:

Years 1-10 at 3.250% with a payment of $652.81

Year 11 at 6.250% with a payment of $841.26

Year 12-30 at 8.250%  with a payment of $975.24

The monthly payment may change when the interest rate on an adjustable rate mortgage is reset. After the initial fixed-rate period, your interest rate can increase annually according to the market index. Current index (CMT 1 YR Treasury) as of August 1, 2014 is 0.1100%. The current index plus Margin rounded to the nearest 0.125 is 2.875%. any change may significantly impact your monthly payment.

Now that we have seen a good disclosure regarding the “terms of the payment” let’s look at the validity of the offer here:

Concerns for me:

• This ad tells me to refinance my 30 year fixed rate loan that I have at 3.750% into an ARM loan to save litterally $42 per month.  The ad does not ask whether I intend to stay in this home longer than the next ten years. If I’m staying in this home for next 20 years I am risk of my payment increasing up to 5% higher if interest rates rise between years 11 and 16.
• The advertised rate is for a 740 FICO. This may raise some UDAAP concerns since that may not represent a fair number of the Bank’s customers as a 740 is a high FICO. This means the rate advertised may not be available to most customers.