ATR and ARM loans

Under ATR, I want to make sure we are calculating DTI and repayment ability correctly.

Our ARM is pretty simple.

Intro rate: Fixed for 3 years. Adjusts every 3 years. Index of .73 plus a margin of 4.25%

Maximum adjustment cap 2.5%

Future margin 4.25

Our software provider is showing that the maximum rate during the first 5 years is 7.98.

The introductory rate is 4.98%; whereas 2.5% could be added at month 37, resulting in a maximum during first 5 years of 7.98% - I am of the opinion that we would use the 7.98% and the cooresponding payment amount to underwrite ATR? Am I correct?

Yes, you would use the maximum rate in the first five years.

But 4.98% + 2.50% is 7.48%, not 7.98%. Did I miss something?

Thanks, you're correct, it was a very long day - just a typo.

Thanks again.

Just to clarify-

You are talking about originating a QM, right?

If you are talking general ATR, it would be the fully-indexed rate of 4.98% in your example.