Mortgage & Refinancing Information

Luxury Real Estate Information


Rancho Palos Verdes, California Homes
Palos Verdes, California Homes
South Bay, California Homes
Luxury Mexican Beachfront Homes

Featured Properties


Oceanfront Estate Near Trump National

Related Information


Loan Information
Real Estate Information
Mortgage Refinance Information

Is an ARM Right For You?


Let's start by taking a look at 7 key elements of an adjustable rate mortgage:

1) ARM defined: While a fixed rate loan is constant and never changes throughout the life of the loan, an adjustable rate mortgage changes periodically. The interest rate of an ARM goes up and down based on whatever external index it is tied to. Add the lender's "margin" to that, and you've got the rate. Add costs to that, and you've got the APR.

Other considerations include the fixed period, the adjustment date, and the adjustment interval. There are built in risk management devices such as caps, conversion clauses, rate ceilings, rate floors, periodic payment caps, and periodic rate caps.

So, while fixed rate loans stay constant and are fairly straightforward, future payments on ARMS is an unknown, and they go up and down depending on a variety of variables.

2) Index: An adjustable rate mortgage is tied to an external index. If you look in the financial section of the paper today, you might see a chart posted for the 1 year constant maturity treasury index, also called the CMT, otherwise known as the 1-year "T-bills". You might see a graph, showing the T-Bills rising and falling in value over time.

About 50% of all ARM loans are tied to the 1 year T-Bills. If this is the index used on your loan, then your house payment will rise and fall alongside the T-Bill index (basically).

This is just one example of an index used for ARMs. There are indeed several, and some are more volatile than others. The point is that if that index goes up, the ARM can go up. If that index goes down, the ARM can go down.

3) Margin: Lenders' add a specific percentage to the index. This is called "margin". Put another way, the adjustable rate equals the interest rate tied to the index plus the lenders' margin. For example, if the T-bills are going for 1.5%, and the margin is 2.5%, then the ARM interest rate is basically 4%.

What's important to know is that different lenders charge different margin, and margin is different from one index to the next. So, just because the margin is cheaper on an ARM tied to T-bills, doesn't necessarily mean it's the best deal. What if the interest rate on a different index, say the LIBOR, is lower? Maybe the margin is higher? Keep your eyes open, and compare the combination of both margin and index, when looking to compare ARMs.

4) Fixed Period: The terms of the loan typically begins with a fixed period of anywhere from 1 month to 5 years or more, where the rate is not adjusted and stays constant (like a fixed rate loan). A 1 month ARM, for example, has a starting fixed period of 1 month, whereas a 1 year ARM has a starting fixed period of 1 year.

5) Adjustment Interval: After the fixed period has elapsed, then there will be an adjustment date in which the rate is modified to conform to the index within the terms of the loan. This interval is typically 1 year, 3 years, and 5 years, but a wide variety of intervals exists.

In other words, you start with a fixed period and the rate is fixed. Then you get to the adjustment date, and the rate goes up or down depending on the index and the terms of the loan. Then you go into the adjustment period, let's say the interval is 1 year, so for 1 year the rate stays the same. Then you get to the next adjustment date, and the whole process repeats itself.

6) Caps: There are built in devices to the ARM that helps manage the risk. For example, most loans incorporate an interest rate ceiling into their terms. The interest rate charged can never exceed the agreed upon ceiling. There is also usually a corresponding interest rate floor (the rate can never drop below this). There is usually a periodic rate cap, that limits the amount the rate can go up or down (during the adjustment period), irrespective of the index. There may be more in the terms of your loan worth exploring, but the important point here is that Caps help control risk. They make the ARM manageable.

7) Conversion Clause: What if 5 years go by, and the rates are still low, and now you're fairly certain you'll be living in your home for the next 10 years. In this instance, it might be wise to switch over from an ARM to a fixed rate. Many loans contain a conversion clause allowing you to convert the loan to a fixed rate mortgage. There is sometimes a fee associated with this provision. Also, the terms of the conversion clause may require a period of time to elapse before it becomes available.

So, is an ARM is right for you?

Of course, that's a question that only you can decide. However, here a few possibilities:

1. Buying Power: - Adjustable Rate Mortgages, in the right market, can allow buyers to purchase higher valued homes with a lower, initial, monthly payment.

2. Short Term Home Ownership: - The average home owner lives in one residence 7 to 8 years (not 30 years). Do you know how long you'll be there? If you have confidence that you're only there for the short term, then an ARM could save you money.

3. Risk versus Reward: - What is your level of comfort with risk and how prepared are you to adjust your finances accordingly? If rates stay steady or decline over the long term, an ARM could offer you the greatest possible savings.

Needless to say, a word of caution is appropriate here. Let's not forget the tried and true warhorse of the fixed rate loan. Fixed rate offers the least amount of risk to the borrower over the long term. There are many unknowns, many variables, and many terms and conditions that need to be considered when looking into an ARM.

The best place to start is always to evaluate fixed rate loans, as a benchmark, and then branch out your options from there. Know the current rates and get a feel for the "trend". Compare several loan offers before signing on the bottom line, and explore all the variables that go into these loans, including the 7 mentioned in this article. Talk to 3 or 4 lenders during this process, to see who you like doing business with. Above all, don't just fixate on the monthly payment. Shop rate, and review the terms of the loan offers.

We provide a free rate-watch at our website, along with a directory of lenders and resources, or you can go to any search engine on the internet and find other useful sites and tools out there.

We've enjoyed providing this information to you, and we wish you the best of luck in your pursuits. Remember to always seek out good advice from those you trust, and never turn your back on your own common sense.

Sincerely, Tom Levine

Copyright 2004, by LoanResources.Net

Publisher's Directions: This article may be freely distributed so long as the copyright, author's information, disclaimer, and an active link (where possible) are included.

About The Author

Tom Levine provides a solid, common sense approach to solving problems and answering questions relating to consumer loan products. His website seeks to provide free online resources for the consumer, including rate-watch, tips and articles, financial communication, news, and links to products and services. You can check out Tom's website here: http://loanresources.net, or you can email Tom at info@loanresources.net


MORE RESOURCES:
This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news


Newsmax

CNBC: Mortgage Refinance Applications Surge 9 Percent as Rates Slide
Newsmax
The increase in the Mortgage Bankers Association's seasonally adjusted report was largely due to a 9 percent weekly jump in applications to refinance. Lenders suddenly have a strong sales pitch, now that rates are significantly lower than they were a ...

and more »


WXIA-TV

Mortgage refinance applications surge 9% as rates fall back
WXIA-TV
Interest rates on home loans are now significantly lower than a year ago, and that may be bringing more homeowners back to their lenders to refinance. Housing development community in a suburban area. Total mortgage applications rose 4.7% last week ...

and more »


The Express Tribune

Mortgage refinance firm to loan home buyers Rs9 billion - The ...
The Express Tribune
KARACHI: Pakistan Mortgage Refinance Company, set up by the State Bank of Pakistan (SBP) with the support of the World Bank, would provide housing finance worth Rs9 billion for middle and low-income groups in the first year of its commercial operation ...
Housing to get boost with cheaper financing - Newspaper - DAWN ...DAWN.com
News BriefThe Nation

all 6 news articles »


Business Recorder (press release) (blog)

Deputy Governor SBP inaugurated office of Pakistan Mortgage Refinance Company
Business Recorder (press release) (blog)
KARACHI: Pakistan Mortgage Refinance Company's office was formally inaugurated here by Jameel Ahmad, Deputy Governor, State Bank of Pakistan (SBP), says an announcement here on Monday. Speaking on the occasion, Jameel Ahmad said that PMRC would provide ...



NMRC refinances N10bn mortgages for PMIs
New Telegraph Newspaper
In its drive to increase homeownership among the citizens, the Nigeria Mortgage Refinance Company (NMRC) has spent N10 billion raised from the capital market to refinance mortgages for primary mortgage institutions (PMIs), New Telegraph has learnt. It ...



Canton Citizen Newspaper

What Can Your Mortgage Do for You?
Canton Citizen Newspaper
Some are less concerned about ever paying off their mortgage. It's a myth that bankers don't want borrowers to pay off their mortgage loans. We're delighted when people own their homes outright, if that's at all possible. The reality is that homeowners ...



Bankrate.com

4 ways to get the best mortgage refinance rate
Bankrate.com
If you can shave at least one-half of 1 percentage point off your current mortgage rate, it can be worth your while to trade in your existing home loan for a new one. Here are some tips for getting the very best refinance rate. 1. Polish up your credit ...

and more »


Best Bank In 'Towne' For A Flat Yield Curve
Seeking Alpha
Towne Bank has great non-interest earning potential to weather this period of low yields. Non-interest income is up 25% YTD, despite a worsening mortgage refinance market. In addition, Towne Bank's core banking operation is top of its class, which ...



11 Ways to Get the Lowest Mortgage Refinance Rate - NerdWallet
NerdWallet (blog)
In the hunt for the lowest mortgage refinance rate, there are some things you can control and some you can't. Here are 11 things you can do.

and more »


Motley Fool

How to Get the Best Mortgage Refinance Rates
Motley Fool
How can you get the best rates when refinancing your mortgage? Follow these steps to get a good deal on a refinance loan. Christy Bieber. (TMFChristyB). Mar 25, 2017 at 7:06AM. Homeowners who refinanced a $200,000 mortgage in the first quarter of 2015 ...

and more »

Google News

home | site map
© 2006 TIGER MEDIA