With a fixed-rate mortgage, your interest rate never changes over the life of the loan. If market interest rates go up or down, your rate will remain the same. With a Home Equity Line of Credit, Adjustable Home Equity Loan, or Adjustable Rate Mortgage (ARM) the interest rate changes as market interest rates change. As a result, your payments will vary as well.
Home Equity Line of Credit
A Home Equity Line of Credit is a revolving line of credit, similar to a credit card. Your line of credit replenishes as you repay it. The interest rate on your Home Equity Line of Credit is determined by the Prime Rate, plus a margin based on your principal balance. Details can be found in the note you signed when you were approved for your loan.
What is the Prime Rate?
The Prime Rate is the interest rate charged by banks to their most creditworthy customers. The Prime Rate has traditionally been priced at 3% above the Fed Funds Rate, which is set by the Federal Reserve. For example, if the Fed Funds Rate target is at 1.50% then Prime Rate will be 4.50%. Third Federal does not set the Prime Rate.
When is the rate on my Home Equity Line of Credit going to change?
Changes to your Home Equity Line of Credit rate are made according to the note you signed when you were approved for your loan. If your note was signed after May, 2007, your rate changes on the next business day following the publication of the new Prime Rate in The Wall Street Journal. If your note was signed prior to May, 2007, the interest rate for your Home Equity Line of Credit is tied to a particular day of the month. Therefore, any changes (up or down) to Prime Rate will not affect your rate until that particular day in the following month. This means you may not see changes in your rate for one or two statements.
Smart Rate Adjustable Rate Mortgages, Adjustable Home Equity Loans
An Adjustable Rate Loan is a loan where the interest rate and payment (principle and interest) changes periodically. The Adjustment Interval indicates how often the loan’s rate and/or monthly payment can change. Your Adjustment Interval is based on the product selected at time of application.
||Product Adjustment Interval
|3/1 Adjustable Rate Mortgage
||The first rate adjustment occurs for the 37th payment of the loan and then annually thereafter.
5/1 Adjustable Rate Mortgage
5/1 Adjustable Rate Home Equity
|Loan The first rate adjustment occurs for the 61st payment of the loan and then annually thereafter.
The initial rate you received at time of application remains in effect until the first adjustment. By law, you will receive a notice of rate change prior to the effective date of change.
How is my new rate and payment determined at the adjustment interval?
Your new rate, or fully indexed rate, is determined by adding the index to the margin. The new payment is based on the remaining term. The index used by Third Federal is the Prime Rate as published in The Wall Street Journal. The margin is a percentage that is added to the index. Details can be found in the note you signed when you were approved for your loan.
Why does my payment change when the rate adjusts?
Each time the rate adjusts, the loan payment adjusts to an amount that amortizes the remaining balance over the remaining term at the new interest rate. Adjusting the loan payment prevents negative amortization.
Is there a limit to how high or low my rate can go?
With an adjustable rate loan, there are two different caps and a floor. These determine how high or low the interest rate can adjust.
- Periodic Cap: This cap limits how much the interest rate can increase or decrease from one adjustment to the next. Third Federal’s current periodic cap is 2.00%
- Lifetime Cap: This cap limits how much the interest rate can increase over the life of the loan. Third Federal’s current lifetime cap is 6.00%.
- Floor: The floor is a minimum rate for which the interest rate can adjust down. Third Federal’s current rate floor is 2.00%.