Fixed  Rates for

Adjustable Rate Mortgage Clients

 

“Fix It” Program

•              The “Fix It” program synthetically converts an Adjustable Rate Mortgage to a fixed interest rate. It is an agreement between the client and the financial institution to exchange interest rate payments  on the clients current adjustable rate, agreed upon fixed rate and of course the $ amount.

 

•             In its most common form, it is a SWAP contract, where one party exchanges fixed-rate payments for floating-rate payments based on an underlying index such as LIBOR

 

 Qualifications

 

¨           Client Must Have an Adjustable Mortgage Note on Property

¨          Eligible Properties:

¤        Single Family Homes

¤        Multi Family

¤        Commercial

¨          Minimum Mortgage Amount:              

¤        $1,000,000 

¤        No Maximum Mortgage Amount

¨          Client Qualifications:

¤        Liquidity:                  $1,000,000

¤        Net Worth:                $5,000,000

¤        Client Pledge:     5% of “FIX IT”/SWAP Amount (open an account with lending bank)

        Documentation Needed:

¨           Personal Financial Statement

¨           Liquidity Statements

¨           Copy of Current Adjustable Note for the Mortgage Client is looking to “FIX IT”/SWAP

        Documentation NOT Needed:

¨           Property Appraisal (Value does not matter)

¨           No Minimum Income requirements

       

Program Client Benefits

 

¨          Client has the ability to decrease exposure to rising interest rates, thus minimizing interest rate risk, by locking in a competitive Fixed Rate.

¨           Client can attain a fixed interest rate on amount less than the total loan amount. Clients will diversify adjustable/fixed rate exposure:  Example: Percentage of Mortgage to be Fixed vs. Adjustable (50%/50%, 60%/40%)

¨           Client can attain a fixed interest rate for a term less then the term of the underlying mortgage. Example: Client can lock in a fixed rate for  5, 7, or10 years even though the client may have 20 years left on their adjustable mortgage.

¨          “FIX IT” Rate is Transferable to Another Property

¨          Bilateral make-whole provision provides for potential prepayment “benefit” or “penalty”, while most fixed rate loans only have a prepayment “penalty”, refer to example below.

¨          Series of  fixed rate terms and $ amounts with varied maturities within one mortgage

 

Termination Scenarios
Profit/Benefit or Loss/Penalty

 

The spreadsheet below illustrates the bilateral make-whole associated with the “FIX IT” SWAP assuming a 50 bps swing either up or down, should it be terminated prior to maturity.

•               When terminating the “FIX IT”/SWAP, the Financial Institution will look at the remaining term of the existing SWAP and determine the going market rate for a new “Replacement” Swap of equal tenor. If the Replacement Swap Rate is higher (lower) than the Original “FIX IT”/Swap Rate, The Financial Institution will pay (receive) the Approximate Mark to Market to (from) the client. Hence, the “bilateral” make-whole

               

                EXAMPLE:  Original Swap Notional: $ 2,250,000      Original Swap Rate: 5.25%

                Termination occurs on the various scenarios below:

           Years Left  on Swap:                   Swap Rate 5.75% Mark to Market                          Swap Rate 4.75% to Mark to Market

 

•               10                                                 5.75%      $85,878                                   4.75%      ($90,381)

•               9                                   5.75%      $79,208                                   4.75%      ($83,008)

•               8                                   5.75%      $72,187                                   4.75%      ($75,324)

•               7                                   5.75%      $64,777                                   4.75%      ($67,296)

•               6                                   5.75%      $56,576                                   4.75%      ($58,907)

•               5                                   5.75%      $48,682                                   4.75%      ($50,191)

•               4                                  5.75%      $39,971                                   4.75%      ($40,960)

•               3                                  5.75%      $30,777                                   4.75%      ($31,390)

•               2                                  5.75%      $21,754                                   4.75%      ($21,392)

•               1                                  5.75%      $10,807                                   4.75%      ($10,916)

•               Note: While early termination may be feasible, it may entail a financial loss/gain for the “FIX IT”/SWAP participant. Additionally, any terms or conditions included herein are to illustrate the logistics of early termination of an interest rate swap, and replacement swap rates may be substantially different than those referenced in the schedule above

 

 

 

 How Rates are Calculated

¨          The “FIX IT” Rate is calculated based on the following Criteria

¨          Current Index on Adjustable Rate Mortgage, found on “Mortgage Note” (Example: 6 month LIBOR, Prime Rate, 1 year Treasury etc.)

¨          Margin above Current Index on Adjustable Rate Mortgage, found on “Mortgage Note”.(Example:  6 month Libor 2, Prime Rate 1, 1 year Treasury 1.50, etc)

¨          Term of desired Fixed Rate time period.(Example: 5 year Fixed, 7 year fixed, etc.)

¨          Size of Loan Amount or $ Amount Client desires to “FIX IT”. (Example: $1,500,000, $2,500,000, etc.)

¨          Current Interest Rate market conditions, these are ever changing throughout the day, based on the various financial market conditions.

¨          Example of “FIX IT” Rate Calculation: Example is for instructional purposes only, not to be quoted as available or factual in today’s market conditions.

¨          Current Index on Adjustable Rate Mortgage:    6 Month LIBOR

¨          Margin Above Current Index:               2   (6 Month LIBOR 2)        

¨          Term of Desired Fixed Rate:               5 years

¨          $ Amount Client desired to “FIXED IT”/SWAP: $1,500,000

¨          Clients 5 year “FIX IT” /SWAP  Rate based on above Criteria:     5.125%

 

Close in 14-30 Days