Our ARMs are discounted at .5 below index plus margin for the initial term. However, at the current time, that rate would be below the floor so the initial rate will actually be the floor. Do I now have to change the wording of my ARM disclosure to use the term "premium" vs "discount". Or can we continue to state that the initial rate is discounted as long as the floor is disclosed also?

As rates go up and down I don't want to keep flipping back and forth between the terms "premium" and "discount".

The floor rate would not be considered a discount or a premium rate. The following is a similar discussion about the payment stream.

http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=1117652#Post1117652

So, do I have to remove the term "discount feature" from my program disclosure if the floor is going to come into play that particular day? How can I word my Program disclosure so that I don't have to keep changing it everytime the discounted rate is affected by the floor.

Here's the language: This variable rate mortgage has a _____feature, and your initial interest rate will not be based on the index used for later adjustments. Please ask about our current discount or premium amount.

Right now we have "discount" in the blank...is that inaccurate on days where the floor is going to make the rate higher than the index+margin rate?

Your program has a discount feature which is based on the index + margin - .50 with a minimum rate of X and a Maximum rate of XX. At the first rate change date (initial term) the rate will convert to the fully indexed rate. At that time it may still be the floor if the index has not moved upward. IMO you do not need to change the program disclosure.

Bringing this back up because I can't wrap my head around it and am apparently making it more difficult than necessary. . .do the terms "premium" and "discount" reflect the fact that the initial rate is not based on the index (or index plus margin) or is it based on the fact that the initial rate is higher/lower than what it would have been given some other factor (say, a floor on the loan)?

Example: Bank offers a teaser promotion with an initial rate of 3.49%. After 6 months and depending on credit score and loan to value, loan adjusts to Prime (3.25% as of today) or Prime + 1 (would be 4.25%). Floor of 4.99% kicks in after first 6 months.

So, for the customer at Prime + 1, it's a discount. I understand so far. But for the customer at Prime, would it be a premium (because the initial rate - 4.39% - is higher than what it would be if it were based on the margin) OR would it still be a discount because the initial rate was less than the lifetime floor of 4.99%?

If the initial rate is not determined based on your formula for determining the fully indexed rate then it is either a discount or a premium.

Your formula is Prime + 0 or + 1 with a floor of X.

If prime plus 0 is 3.25% or prime + 1 is 4.25% and you have a floor of 4.99% then the 3.49% would be a discounted rate based on your formula.

Dan, thank you so much; that is the clearest explanation I've seen. Just one follow up question to make sure I'm understanding: the fact that the 4.99% floor doesn't apply until after the first 6 months is a moot point because at the loan date, the floor is higher than the initial rate (3.49%). So, in essence, the initial rate is the floor for 6 months and a different floor kicks in after 6 months. . .yes?

Again, thank you so much!!

I'm not following this statement, but:

Your formula is prime + 0 or + 1 with a floor of X.

Currently (at the time the initial rate for the loan is set) prime + 0 is 3.25% and prime + 1 is 4.25%. Both are below your floor of 4.99%, therefore based on your formula your initial rate should be 4.99%.

However, you are setting the initial rate at 3.49% which is a discount of 1.5% for the 1st 6 months. At the end of 6 months your "teaser/discount" rate will convert to your formula. And depending on what happens with prime over the next 6 months the rate will adjust to either prime + 0 or prime + 1 or 4.99%, whichever is the higher rate at the time.