Consider Your Options With Adjustable Rate
Mortgages
This Option May Not Cost You An ARM – Consider Your Options With
Adjustable Rate Mortgages
Adjustable rate mortgages, or ARM's, are useful types of mortgages with
set plans and terms which may help you in deciding which type of loan to
get when buying or refinancing a home. An ARM is flexible and changes
during your term of mortgage depending on certain guidelines and
adjustments. An ARM will generally start at a lower than fixed rate
mortgage, then begin to fluctuate throughout your loan term. If you decide
to get an ARM when getting into a loan, there are several things to know
that will help decide if it is right for you.
The first thing that applies to adjustable rate mortgages is that it is
based around the ideal of lowering mortgage payments when fixed rate loans
begin to rise. By doing so, mortgage lenders are able to offer lower
prices for those who have a mortgage. One of the principles that apply is
that there is a fixed period term, where the rate will have to stay the
same. Depending on the type of ARM you are thinking about getting, this
rate can last anywhere from the first month you decide to get the loan to
up to ten years. The thing to consider with the fixed plan is how long you
will be in your home and how this fixed rate will affect you with changes.
A second part of an ARM loan is the index. This is tied to the interest
rate and helps to determine the adjusted rate. The indexes can come from
several different sources. These include the 12 MTA, which is a one year
treasury guide that is available. Another is the LIBOR, or London
Interbank Offering Rate. These are updated every one to six months. There
is also the Cost of Funds Index (COFI), Cost of Savings Index, (COSI), and
Cost of Deposit Index (CODI). These are not recommended before the others,
as the indexes seem to fluctuate more than necessary. A last way to find
an index is through a bank prime rate. These, however, are based mostly
around home equity lines of credit. The way that indexes work is that each
set index has a margin. The margin determines your interest rate after the
fixed period. These will vary widely depending on the index and lender
that you have. The index will then tell the percentage of the adjustable
rate in which you will have to pay. By knowing the index that the lender
is using, you can find a lower adjustable percentage rate for your
mortgage.
A third part to ARMs is the caps. This restricts the rate change to move
no less than two percent, and no higher than six percent. This allows you
to not have to pay high rates at one period of time because of the index
and margin guides that are available. There are also start rates that are
applicable with ARMs. These will vary by lender and index, and will most
likely depend on how much you put as your down payment and what your
credit rating is.
ARMs are helpful in offering you four different types of payments based on
the index and caps. The first type is the minimum payment option. This is
the lowest of the options. You do not pay the principle or the interest on
the loan. The interest that is then not paid is simply put into an
interest due, which increases the loan balance. This is also known as
deferred interest or negative amortization. The next option is through the
interest only payment. This will allow you to defer interest without
having to make a principal reduction payment. The interest only payment
will always have a restricted amount of time for you to pay the loan. The
next type of ARM is a 30 year payment. With this type of payment, every
payment will go towards principle and interest at a consistent pace. The
fourth type of payment is the fifteen year payment. This is the same type
of ARM as the 30 year option, but it is paid at an accelerated pace.
By using ARM as an option for a loan or for paying off a mortgage, one is
able to see more flexibility in their payments, which can help them with
finances and to pay off a loan with more ease. Before getting into an ARM
loan, it is important to know what types of rates and terms apply so that
you can get the best deal.
