New mortgage rules the Consumer Financial Protection Bureau announced last week will change how lenders decide if borrowers qualify for adjustable-rate mortgages.
The "ability to repay" rule, which goes into effect in January 2014, requires lenders to consider more than just the loan's initial interest rate in determining whether someone can afford the loan.
The new rules are intended to keep lenders from getting borrowers into mortgages they can't afford. Unlike regular fixed-rate mortgages that have the same rate and monthly payment throughout the life of the loan, rates on ARMs change, which can lead to larger monthly payments that make it harder for a borrower to afford the loan.
Instead of using the introductory rate in their calculations, lenders will be required to consider the loan's "fully-indexed rate." This is defined as the margin the lender has on that loan plus the index the loan is pegged to.
For instance, an ARM with a 225-basis-point (2.25-percentage-point) margin that's pegged to the one-year LIBOR, currently at 0.84%, would have a fully-indexed rate of 3.09%. The lender will have to make sure the borrower has the ability to make the loan's monthly payments at this rate, even if the initial rate they're offered is lower than that.
While many lenders already use the fully-indexed rate to approve borrowers, it isn't a standard used throughout the industry.
For borrowers, the new rule could make it harder to qualify for ARMs since all lenders will be using rates that are higher than the initial rate available on this loan. Experts say it could lead to fewer ARM originations once the rule is implemented.
courtesy of: http://www.marketwatch.com
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