THE BASIC FEATURES The Adjustment Period with most Arms is the interest
rate and the monthly payment changes in varables of every month, year or every three
to five years.
The period between one rate change and the next is called the "adjustment period."
A loan with an adjustment period of one year is called a one-year ARM, and the interest rate can change
once every year. Most lenders tie ARM interest-rate changes
to changes in an "index rate." These indexes typically vary up and down.
Most lenders tie ARM interest-rate changes to changes in an "index rate." These indexes typically vary up and down.
Most lenders tie ARM interest-rate changes to changes in an "index rate."
These indexes typically vary up and down.
Most lenders
tie ARM interest-rate changes to changes in an "index rate." These indexes typically
vary up and down.
Payment Fluxuations:
Most lenders
tie ARM interest-rate changes to changes in an "index rate." These indexes typically
vary up and down.
Types of Indexes:
Lenders base ARM rates on a variety
of indexes.
Their are a variety of indexes
concerning the ONE, THREE, or FIVE-YEAR
Treasury Securities.
Another common index
is the National or Regional Average
Cost of Funds
to savings and loan associations. A few lenders
use their own cost of funds as an index, which gives them more control than using other indexes. You should ask what index
will be used and how often it changes.
Also
ask how it has fluctuated in the past and where it is published, we have booklets on this subject if you are interested in
knowing more.
The Margin to determine the interest rate on an ARM,
lenders add to the index rate a few percentage points, called the "margin."
The amount of the margin may differ from one lender to another, but it is usually constant over the life
of the loan.
Index Rate + Margin = ARM Interest Rate
Let's say, for example, that you are comparing Arms offered by two different lenders. Both Arms are for
30 years. The Index will be the 1.25% and the Margin will be the 2.75% what you do is add them together to get your qualifying
rate of 4%.
Let's say, for example, that you are comparing
Arms offered by two different lenders. Both Arms are for 30 years. The Index will be the 1.25% and the Margin will be the
2.75% what you do is add them together to get your qualifying rate of 4%.
Payment Shock may
occur if your mortgage payment rises very sharply at the first adjustment.
Let's see what would happen in the second year if the rate on your discounted 4%
ARM were to rise to the 6% "standard" rate on a $100,000.00 Mortgage.
You would start off paying $477.42 dollars per month (not including taxes
and insurance) to $599.55, that is $122.13 jump in your monthly mortgage payment.
You
can see what might happen if you choose an ARM because of a low initial rate. You can protect yourself from large increases
by looking for a mortgage with features, described next, that may reduce this risk.
ARM Interest Rate Monthly Payment 1st year (w/discount) @ 8% $476.95 2nd year @ 10 %
$568.82
ARM Interest Rate Monthly
Payment 1st year (w/discount) @ 8% $476.95 2nd year @ 12% $665.43
HOW CAN
I REDUCE MY RISK:
Besides
offering an overall rate ceiling, most Arms also have "caps" that protect borrowers from extreme increases in monthly
payments. Others allow borrowers to convert an ARM to a fixed-rate mortgage.
Besides offering an overall rate ceiling, most Arms also have "caps" that protect borrowers from
extreme increases in monthly payments. Others allow borrowers to convert an ARM to a fixed-rate mortgage.
While they may offer real benefits in decreasing your current monthly mortgage
payment, these Arms may cost more later down the road. Many of these lenders do not provide you with these low interest loans
(below bank rate) unless you have adequate equity in your home to support any negative amortization
that may increase.
WHAT IS NEGATIVE AMORTIZATION:
Negative Amortization also known as (deferred
interest) is simply paying less than the prinicpal and interest due. When you look at a Fixed Rate loan is it alloted to make
up for any difference that a lender may suffer. Fixed Rates are typically higher for the simple reason of yield in the long-run.
INTEREST
CAPS COME IN TWO VERSIONS:
Periodic caps: which limit the interest-rate increase from one
adjustment period to the next; and * Overall caps, which limit the interest-rate increase over the life of the loan.
Interest-Rate Caps:
an interest-rate cap places a limit on the amount your interest rate can increase, these caps are important because your payment
will never increase more than the cap allowed.
PRE-PAYMENT PENALTY:
Some agreements may require you to pay special fees or penalties
if you pay off the ARM early. Many Arms allow you to pay the loan in full or in part without penalty whenever the rate is
adjusted.
Prepayment details
are sometimes negotiable. If so, you may want to negotiate for no penalty, or for as low a penalty as possible.
Conversion:
Your agreement with the lender may include a clause that lets you convert the ARM to a fixed-rate mortgage at designated
times. When you convert, the new rate is generally set at the current market rate for fixed-rate mortgages.
The interest rate or up-front fees may be somewhat higher for a convertible
ARM. Also, a convertible ARM may require a special fee at the time of conversion.
