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Adjustable Rate
Mortgages
An adjustable rate mortgage, often called ARM, has an interest rate that is not fixed. The
interest rate varies based on one or many indexes. This could be to the
one-year treasury bills or to another specific index. You may note that
different lenders tie the adjustable rate to different indexes.
Examples of some quite common indexes are:
·
Treasury
notes and bills
·
The
Federal Housing Finance Boards National Average mortgage rate, which is
an average rate for loans closed.
·
The
average interest rate paid on jumbo certificates for deposit. It may also
be based on the costs of funds for the specific lender.
Many of these indices that the adjustable rates are typically based on
are published in the newspaper. Before going for an adjustable rate
mortgage, check where you can find the published adjustments, if there
are any types of sources for projections, and where the underlying index
on which the adjustable rate is based is posted.
It goes without saying that the interest rates can go up or down.
Therefore this type of mortgage loan can be a very viable option for
people who are not too sensitive to fluctuating financing costs. Shopping
for an adjustable rate mortgage can be more difficult than shopping for a
fixed rate mortgage.
What are the advantages of an adjustable rate
mortgage?
With a lower adjustable interest rate the monthly amount will be less.
You may therefore qualify for a larger mortgage, or you may qualify for a
loan easier. Lenders use your gross
monthly income and your monthly mortgage payment to determine how much
you can qualify for.
Given that you plan to stay in the home for a limited time period, a
couple of years or so, an adjustable mortgage may be a great option. The
main parts of benefits of an initial low interest rate will be gained
during this period.
If current interest rates are very high, this could be the only loan
choice available to you. But if you are risk avert, maybe this is not be
the option for you.
The fine print of an adjustable mortgage loan
It is important that you study the details of the loan; below you find
some of the basics and terminology explained. In summary when looking at
an adjustable mortgage rate you should consider in addition to basic rate
and index information:
·
Initial
rates
·
Margins
·
Adjustment
intervals
·
Rate
caps and payment caps
Initial rate or teaser rate
The initial rate you are charged on the loan is generally lower than
current interest rate. This can be an excellent way of purchasing a home
you may not be able to get a fixed rate loan for, as the initial payments
will be lower. As mentioned, when the bank is deciding how large of a
mortgage you qualify for they base this on the monthly payments you can
afford each month. Therefore a low initial rate on an adjustable rate
mortgage can help you qualify for this type of loan but not for a fixed rate mortgage.
Margin
At the end of the initial rate term your interest rate will be based
on the indexes specific for your loan. This index (or indices) is not the
actual percentage interest rate you will be paying, but rather the basis
on which they are calculated. In most cases some sort of a margin must be
added to this to give the actual interest rate. This margin may vary. The
index plus the margin will give the actual adjustable rate that the
interest defaults to after the initial term.
Interval of adjustment
Be sure to ask for and
understand the interval of adjustment for you mortgage. If the interval
is one year, then the interest rate for the mortgage remain the same for
one year and then changes in accordance with the index (and the margin).
The mortgage rate will continue to adjust for the entire term of the
mortgage.
Rate cap and payment cap
Besides margin and adjustment
intervals, be sure to find out everything about rate caps. A rate cap is
the maximum percent increase that can occur at each interval of
adjustment. A payment cap is the maximum amount that your payment can go
up at each adjustment interval.
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