Affordable Adjustable Rate Mortgages
lower payments on 2/28 - 3/1 - 5/1 - 7/1 - 10-1 ARM.
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Calculators show adjustable
mortgages rates offer lower payments and interest on 2/28 - 3/1 - 5/1 - 7/1
- 10-1 ARM home loans.
Adjustable
Rate Mortgages, also called ARM home loans, offer borrowers a lower
monthly payment and interest in return
for participating in the risk of moving markets over the term of the loan.
Adjustable mortgage rates are an extremely common method of financing real
estate when current market interest is high or
temporarily rising. Homeowners enjoy
lower interest and payments for a fixed time period, usually from 1 to 10 years. After the initial fixed term of the
adjustable rate mortgage or ARM loans, the percentage can go up or down, usually
not to exceed 2% per year. The borrower can then either refinance or sell the property
usually without a pre-payment penalty. If the home owner does not plan to
keep the property long term, the ARM or Adjustable Rate Mortgage loan is
probably the best home
financing option. The reason for this is that the 30 and 15 year fixed interest programs are the
most expensive of all real estate loans. The lender has their return on
investment fixed for a long time. If you don't need the financing for that long, why pay for
it? Monthly Interest Only
payment options are also available on these programs offering even lower
payments. Of course the principal may be prepaid if you wish to.
How safe are adjustable mortgage
rate programs for the borrower? Very safe, now.
Brokers and lenders offering this financing
tool got a bad rep when they first came to the market. This was mainly because they had no
periodic or life of the loan adjustment CAPS. Caps are a limit placed on how
much the interest and / or monthly payment can increase or decrease. On average,
the annual adjustable rate loan mortgage caps are 2% in
interest or 7.5% maximum increase in monthly payment. These are
maximum increases but your payment could, in reality, go down. The maximum life
of the loan increase
of the ARM is usually 5 to 6% over the start or base rate. The caps
allow you to compute the when and how much the maximum increases can affect your
payments. If you can afford
that, regardless of the probability, you're ok. If you can't handle
the maximum possible increases over the term you expect to keep the loan, you
may want to consider a longer term fixed program. Just because you can qualify
for a ARM, doesn't mean you
should take one. Your loan counselor can help advise you.
Speaking of qualifying, there are
benefits here. Borrowers can
qualify for a loan at the lower start rate. A
good faith estimate will disclose costs and fees are not any higher than
fixed programs. Adjustable rate ARM mortgages can help you to
credit qualify for more new home or
higher refinance amount. If that dream house seems just a little too expensive,
an ARM loan may help make it possible to own. From an investment standpoint,
buying a more expensive home will pay higher appreciation profits when it's time
to sell and move on. Get information on loan
pre-qualifying and other home buying tips
if you're an new or first time home buyer.
An ARM adjustable rate mortgage, will adjust
periodically based on the index used. An index is the benchmark to which the
margin is added to arrive at the note interest rate on adjustable mortgages. Index + Margin = Interest %.
Margins can vary widely so shop around. There
are many different indices used in ARM loans. These indices are published in
most daily newspapers and easily found in the business section. A few of the
more common indexes are the 3 month, 6
month, 1 year T-Bills. Others include the COFI - Cost Of Funds Index, and the
LIBOR - London InterBank Offered Rate.
Indices can be
divided into two general categories. Those based on averages and those
based
on the more volatile spot market. ARMs indexed to averages will usually move more slowly and in gradual
steps regardless of if the markets are rising or declining. ARMs based on the spot market
will go
up and down quickly on a day to day basis.
Below are some graphs of some of
the most common indices. The show the history of the T-Bills and LIBOR over a 10
year period.
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