Adjustable Rate Mortgages |
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Compared to fixed rate mortgages, Adjustable Rate Mortgages (ARMs)
offer a lower interest rate to start, so your monthly payments are
generally lower. But, the interest rate is adjusted at times, based
on an "index". Some of the common indices include United States
Treasury bills, California's 11th District Cost of Funds and the
London Interbank Offered Rate (LIBOR). Every lender then adds a set
margin to that index. The result - your payments could go up or
down, depending on the economy and its resulting indicators. The
interest rate fluctuates over the life of the loan but the loan
agreement generally sets maximum and minimum rates. Look for ARMs with interest rate "caps". These limit how much your rate can go up or down each time it is adjusted, and how much it can go up or down over the life of the loan. Consider an Adjustable Rate Mortgage if you:
Although many Adjustable Rate Mortgages allow you to qualify for more home than you could get with a fixed rate mortgage, some companies still qualify you based on the maximum interest rate. Again ask questions so you know exactly what you are getting. New nontraditional mortgages: Adjustable Rate Mortgages should be carefully considered before signing the bottom line. On April 20, 2006, Comptroller of the Currency John C. Dugan told a community development conference that new types of mortgages aimed at making homes more affordable may offer low monthly payments initially, but will lead to significantly higher payments later. "After the limited initial period ends, the monthly payment for the holder of a nontraditional mortgage must increase -- even if interest rates stay flat -- and the size of that increase can be very substantial". "At its core, the 'bargain' in a nontraditional mortgage is that the borrower pays a lower monthly payment now in exchange for the near certainty of a higher monthly payment later." In the case of one such mortgage, the payment option ARM, homeowners with typically structured and priced loans could see their monthly payment double at the end of the initial period, usually about five years. If you are considering an Adjustable Rate Mortgage make sure you fully understand the terms and the implications of the mortgage. These new nontraditional ARMs are complicated so read carefully. Lenders marketing these loans are focusing on the low payments up front, while giving relatively little attention to the likelihood of much higher payments later. Federal agencies are scrutinizing these new loans carefully. Some intervention may be coming soon which will beef up the disclosures.
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