Adjustable rate mortgages are to home buyers as carrots are to bunnies – very tempting. The secret to figuring out if an adjustable rate mortgage is a good deal is the rate index used.

Indexes – Setting Rates

Lenders really want your business and are willing to create enticing loan products to get it. Occasionally, lenders will offer adjustable rate mortgages that offer a lot of carrot on the front end, but none on the back end. These loans are typically offered to you with an insanely low initial interest rate, which has you looking at mansions and other structures completely out of your realistic price range. The problem with these loans is the rate rises dramatically after six months or a year when the rate becomes pegged to an index.

Indexes are a unique animal when it comes to the mortgage industry. An index is a calculation of general interest rates charged across a number of financial markets that a bank uses to set a real interest rate on your loan. Common financial markets or products considered in this index include six month certificate deposit rates at local banks, LIBOR, T-Bills and so on. Let’s take a closer look.
(more…)

Remember when your mom told you that if it sounds too good to be true, it probably is? The same could be said about Adjustable Rate Mortgages (or ARM in industry lingo). These guys can be a wolf dressed in sheep’s clothing and if you aren’t careful they are going to huff and puff and take your home away!

An Adjustable Rate Mortgage works like this. Initially, you are probably going to be paying anywhere from 2 – 3 % below the current market interest rates on your mortage. For many people, this allows them to buy a bigger house, one that would normally be outside their price range. The normal reasoning is that by the time the loan adjusts – which could be a year from now, or as much as 7 – 10 years from now – they will be earning more, the economy will be better, etc.

The problem they run into is that as good as we hope the future is – sometimes it isn’t. Lives change, the economy fumbles or we change jobs. Suddenly, we went from two incomes to one or we just aren’t making as much as we were a few years back. Even worse, interest rates rise and when it comes time for our ARM to adjust it goes up – way up.
(more…)

Adjustable rate mortgages (ARM), developed when mortgage interest rates were high, can help you finance the purchase of a home with low interest rates. An ideal choice for those who expect their income to rise or move in a couple of years, an ARM also increases your risk for higher payments. Fortunately, lenders also offer safeguards to limit some of your risk to excessively high interest rates.

ARM Features

An ARM starts with a low interest rate, up to 3% lower than a fixed rate mortgage. With lower rates, you usually qualify to borrow more than with a fixed rate home loan.

ARMs usually start with a fixed rate period and end with fluctuating yearly interest rates, increasing or decreasing your monthly payment. So a 3/1 ARM means 3 years of fixed rates with interest rates changing every year after that. Interest rates are based on an index, usually the rate on the T-bill or LIBOR, and the margin the lender adds to the index.
(more…)

What Is An Adjustable Rate Mortgage (ARM)?

An adjustable rate mortgage is certain type of home mortgage that has a variable interest rate. Compared to a 30 year fixed mortgage, the borrower’s payment is considerabely less. This is due to the transfer of risk from the lender to the borrower.

The Structure Of An ARM

There is a wide variety of adjustable rate mortgage’s. The 2 main components can be recognized by it’s name.
(more…)