7.5% "Payment Cap" - (your the next year's monthly payment would be capped at a max of 7.5% of the prior years payment): E.g., if you had a $250,000 loan amount, the next 5 years "Minimum" payments would be as follows (this example is using a 1.0% Starting Rate):

1. 1.       $804.10

2. 2.       $864.41

3. 3.       $929.24

4. 4.       $998.93

5. 5.       $1,073.85

One of the keys with the MTA, COFI, COSI, LIBOR and CODI "Option ARM" program is their yearly *7.5% "PAYMENT Cap" vs. the traditional "Interest-Rate" Cap. offered on most ARMs and HELOC's (Home Equity Lines Of Credit.)

Option ARM Lenders do not implement the traditional yearly Interest-Rate caps (e.g., 2/6 or a max of a 2% increase p/y with a max of 6% over the initial starting Rate.) For example, on 01/01/06 a $100,000 balance at 6.5% (30-yr. amortization) would have a monthly payment of $632.06. If over the course of one year the Interest Rate associated with this mtg. (e.g. T-bill, Prime Rate, LIBOR etc.) were to increase by 2% to 8.5%, the lender would take the new lower loan balance on 01/01/07 (let's assume it would be $98,882) and multiply it by 8.5% correlating into a new monthly payment of $760.31 for that year or an increase of $128.25 p/m.

Using this same example with a 7.5% "Payment Cap",  this same $100,000 balance with monthly payments of $632.06, the next years monthly payment would only increase to $679.46 or an increase of only $47.40 vs. $136.91; i.e., $632.06 X 1.075% =$679.46.  

Recast Provision: (On your Truth-In-Lending Statement (TIL) it will tell you the recast provision; i.e., Your existing principal balance may never exceed 110%, or 115% or 125% of the original principal balance amount in any 5 year period (some Lenders allow a 10 yr. period.) However, if deferred interest (negative amortization) ever caused your principal balance to reach these limits, the Lender would immediately increase your Minimum payment without regard to the *7.5% payment cap. The increased Minimum payment would pay off the loan at the then current fully-indexed rate (Index + Margin) and remaining term. In that event, in the 5th, 10th, 15th, 20th, and 25th years, the Lender would take the amount of deferred interest, add it to the existing balance, and "recast" or re-amortize the loan so that it will still pay off on its original term. Moreover, some Lenders have the right to recast your amortization or term every fifth year even if you did not defer your Interest up to the 110%, or 115% or 125% max.)

Every Option ARM also has a yearly Life cap (max Index + Margin.)

Example: If your Life Cap = 9.95% and your Margin = 2.45%, the maximum the Index could increase is 7.50% or 9.95% - 2.45% = 7.50%.
 

• The Margin is fixed for the life of your loan

• The Index changes every month beginning in month two