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With all the different mortgage p rograms
available today, it is sometimes very difficult to figure out which loan
makes the most financial sense. This month I’d like to explain many of the
terms used by lenders about the ARM (adjustable rate mortgage). ARM Defined An adjustable rate mortgage allows the borrower to get in at a rate below market. As the loan matures, your rate may or may not fluctuate up or down. This is determined by the market conditions. Before you decide on an adjustable rate mortgage, it is important to learn the terminology. Initial Interest Rate This is the below-market rate charged by the lender for the initial term of your ARM. Watch out for rates described as “introductory discount” or “teaser rate.” The “full rate” that follows those too-good-to-be-true rates can really drain your budget. Adjustment Interval The adjustment interval is how often the interest rate can be adjusted annually. It could be every six months, yearly, every three years, etc. A longer adjustment period insulates you from a fast-paced, interest rate-rising environment. Index The index is the base rate used by the lender to determine your new rate when it is time for your adjustment. You may have heard of “Treasury Bonds” or “COFI.” There are others, but these are the most common. |
Margin The margin is the percentage added onto the index to determine your new interest rate. Once the lender adds the two together, they round it up to the nearest 1/8th of one percent and this is your new interest rate. You must always check out this area when getting an ARM mortgage. You may get a low rate in the beginning, but if the margin is high, all of the remaining years of the mortgage may be higher than a lower margin and a higher initial interest rate. Adjustment Rate Caps The rate cap is the maximum limit your loan may be adjusted. For instance, if your rate cap is 2% and your rate is 7%, your mortgage cannot fluctuate more than 2% up or down for any scheduled adjustment. This means your adjusted rate would not be lower than 5% or higher than 9%. The new rate is based on the index plus the margin, not to exceed the above limits. Also, check out the lifetime cap. Convertibility Check the convertibility feature on your ARM. Some ARM loans allow you to convert to a fixed rate mortgage. This feature may cost you additional money in the form of a higher rate or points in the beginning of your loan, but some people like the security of having that option. Depending on the closing costs in your state, it is usually less expensive to refinance your mortgage than convert to a fixed one. If you have any questions, please feel free to call me. I’m always here to assist you. |
