Minimum Payment Option

This is the lowest allowable payment you can make. Initially, the amount of the Minimum payment is determined by the introductory rate of the loan and typically is held constant for a certain period of time (usually 12 months).

Although the Minimum Payment stays the same for a prescribed period of time, the interest rate may change monthly (after the end of the introductory period, usually on the 1st or 3rd payment due date) based on changes to the index value. The Minimum Payment most likely will not pay all of the interest accrued on the loan for the previous month. Any interest not paid is "deferred interest" and is added to the principal balance owed. The amount added to the principal balance is known as "negative amortization".

If you select the Minimum Payment amount, you may experience a significant payment increase when the Minimum Payment amount changes. The Minimum Payment amount increase may be due to negative amortization or an increase in the index value. (A payment cap prevents the Minimum Payment from changing more than the preset percentage, disclosed in your closing documents, during certain years.)

See more information in later section on Deferred Interest and Loan Recast.

Things to consider:

• Making the lowest payment allowed may not cover all of the monthly interest charges due. This causes negative amortization (an increase to the loan balance) and will limit equity build-up in your property.
• You should consider reviewing your monthly account statement to better understand how your previous payment patterns have affected your loan balance.

Interest-Only Payment Option

The Interest-Only Payment pays all accrued interest for the billing period. By making the Interest-Only Payment, you avoid adding any deferred interest to the loan balance; however, the payment will not reduce the outstanding loan balance. The Interest-Only Payment amount may change with each monthly interest rate change, even if the outstanding loan balance stays the same. When you make Interest-Only payments, you may still experience significant payment increases due to monthly interest rate changes.

Things to consider:

Interest-Only payments do not pay down the loan balance and are not available if the amount is lower than the Minimum Payment.

Amortizing Payment Option

The Amortizing Payment pays both the principal and interest portions of the loan balance, amortized over a 30- or 40-year period, depending on the term selected at the inception of the loan. This payment amount may change monthly based on the index value used to calculate the interest rate of the loan. The change in interest rate is limited only by the lifetime rate cap.

Things to consider:
Making the Amortizing Payment:

• Reduces the outstanding loan amount
• Pays all monthly interest owed, which prevents negative amortization
• May still result in significant payment increases because interest rates can change monthly

Accelerated Amortizing Payment Option

The Accelerated Amortizing Payment amount pays both the principal and interest portions of the loan balance amortized over a 15-year period. This payment amount may change monthly based on the index value used to calculate the interest rate of the loan. There is no limit to the amount this payment can change from month to month, unless the lifetime rate cap is reached. Borrowers making Accelerated Amortizing Payments may still experience a significant payment increase because interest rates can change monthly

Things to consider:
Making the Accelerated Amortizing Payment:

• Reduces the outstanding loan amount
• Pays all monthly interest owed, which prevents negative amortization
• Requires monthly payments that are higher than the other amortizing payment option
• Shortens the repayment time of the loan and reduces the lifetime interest paid on the loan

Deferred Interest
(Also known as Negative Amortization)

When the Minimum Payment is less than the Interest-Only Payment, the Minimum Payment will not be enough to pay all of the interest due on your loan from the previous month and will not reduce the principal balance. In this case, if the Minimum Payment is made, the unpaid interest is added to the principal balance owed on your loan. When the principal balance increases, interest is charged, at the present Note rate, on the higher principal balance.

Loan Recast

Due to the variations offered with Payment Option ARM products, you need to refer to your loan documents to assess the options for recast on your particular loan. Payment Option ARM loans call for a recast or recalculation to occur upon the earlier of: (i) the cycle as specified in the loan documents (typically every fifth year) or (ii) when the unpaid principal balance reaches the maximum principal balance limit (typically 115% of the original loan amount but may vary from 110% to 125%).

The recast adjusts the Minimum Payment so the loan is paid by the maturity date. (NOTE: At the time the loan is recast, the Minimum Payment can increase or decrease by more than the payment change cap stated in the loan documents). On the month the loan recasts, the new Minimum Payment is the calculated full principal and interest (P&I) payment based on the remaining loan balance, months left on the loan to maturity and the fully indexed accrual rate. When your loan is recast, either because it reaches the recast date or as a result of the loan balance reaching the maximum principal balance limit (anywhere from 110% to 125% of the original loan balance), the amount of the Minimum Payment could substantially increase. Furthermore, the total amount owed on your loan could be more than the value of the home.

Answers to Some Common Questions

Q. How is the Minimum Payment calculated?
A. The initial amount of the Minimum Payment is set for a period of time as specified in the loan documents (the first year of the loan, for example), and is typically based on the initial interest rate for the original loan amount. The Minimum Payment then adjusts annually (or as stated in the loan documents) or whenever the negative amortization limit is reached. The increase to the Minimum Payment is usually limited by a payment change cap. However, payment change caps do not apply when the negative amortization limit is reached or when the loan recast is scheduled to occur as specified in the loan documents.

Q. What is deferred interest, or negative amortization?
A. Deferred interest is the shortfall, if any, between the amount of interest due on a loan and the amount of interest paid. Interest defers whenever the Minimum Payment is not large enough to pay all of the interest due on the loan. Because payment change caps limit only the amount of the payment increase and not the interest rate increase, the Minimum Payment may not cover all of the interest due on the loan. If the Minimum Payment does not cover all current monthly interest due, the unpaid interest for the month is added to the loan balance (the amount added is called "negative amortization") and future interest is charged on that amount. Deferred interest will increase the amount a borrower owes and will reduce the equity in the property securing the loan. (NOTE: Payment Option ARMs include a cap on how high the principal balance can increase. This cap, typically ranging from 110% to 125% of the original loan amount, is defined in the loan documents.)

Q. How is my monthly interest rate determined?
A. After the initial introductory interest rate period ends, the interest rate on the loan typically changes every month based on an index and margin specified in the loan documents. The applicable index is added to the margin (a fixed percentage identified in the loan agreement) and it becomes the new, fully indexed rate. The new rate is subject to any rounding provisions and may be limited by a "ceiling" or "floor" provided in the loan documents

Q. Sometimes I do not see all payment options on my statement. Why?
A. Payment options are available only when they are larger than the Minimum Payment. For example, if the Minimum Payment is more than the current monthly interest due, the interest-only payment option will not appear.

Q. Besides the maximum life-of-loan interest rate, are there other features I should be aware of?
A. Yes. Whenever the loan balance reaches its maximum negative amortization (for example, 115% of the original amount borrowed), the Minimum Payment automatically becomes the smallest Amortizing Payment based on 30 or 40 years, whichever was selected at the inception of the loan.