ARM’s: The Beginner’s Guide

If you’re a first time home buyer, one of the things you need to do is shop for a good mortgage rate. Aside from looking for the best lender with the lower rates, it’s also good to know what types of mortgages there are available. One of those mortgages is the ARM or adjustable rate mortgage. This type of mortgage is harder to understand than the fixed rate one simply because your interest rate and monthly amortization could vary over time.

ARM’s may sound very juicy at first because of their low rates, but there’s always a word of caution about them. To understand how ARM’s work, there’s a few things you need to know.

1. Initial rate and payment
– This is what usually catches the attention of home buyers. This rate is what you need to pay for the first few years. However, after the initial period, this rate is subject to change, depending on the ARM’s policy.

2. Adjustment Period – This is what you see before the acronym ARM. For example, is it a 1-year ARM, a 3-year ARM? The number means the number of months or years the bank can again change your rates. After each span of adjustment period, your rates could be different.

3. Index - Your interest rate is affected by two factors, the index and the margin. The index is the general measure of interest rates. The most common indexes are they 1-year constant maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). Ask your bank which index they are using, how much it has fluctuated over the years, and where it is published. The more stable the index is, the less prone to hikes your interest rate will be. This information is also available in newspapers and online.

4. Margin
- The margin is the extra amount the lender adds. This value is usually constant over the life of the loan. A fully indexed rate is equal to the margin plus the index. For example, if the index is 5%, then the margin is 3%, then the fully indexed rate is 8%. Some lenders base the margin on how good your credit score is, another reason to pay your debts on time.

5. Interest-rate caps - This is the limit of how high your interest rate can go. There are two types: the periodic cap and the lifetime cap. The periodic one limits the rates from period to period, while the lifetime has a fixed upper range for the life of the loan.

6. Payment cap – Aside from the interest cap, payment caps are also offered by some lenders. This is a rate where your succeeding payment cannot increase more than that range. For example, if your payment cap is 6%, then your next monthly payment cannot increase more than 6% of your previous amortization.

So these are the things you need to know about ARM’s. Once you’ve gotten yourself familiar with the terms, it’s easier to ask smart questions to your banker and really know what the whole deal is about. Take precaution when considering an ARM. You don’t want to end up paying more than you can afford.


The Worst Is Over – Mortgage Rates Going Up

After almost a year of economic crisis in the housing and real estate markets, it looks like the worst is finally over. The nation’s top housing officials have declared that the housing price slump is finally coming to an end, and it looks like mortgage rates will be going up this week.

The latest survey of mortgage rates from top banks have shown that all types of mortgages are going up. 30 year fixed mortgages now have an interest rate of 4.79 percent, which is higher by 8 points from last week. The 15 year fixed rate home mortgage also showed a rise with 3.9 percent compared to a 3.86 percent rate last week. Jumbo mortgage rates also went up by 6 points, coming from 5.21 percent to 5.27 percent.

Even adjustable rate mortgages are not left out with this upward swing. The 5/1 ARM went up to 3.49 percent, an increase of 4 basis points.

The secretary of the US Department of Housing and Urban Development also stated that “it’s very unlikely that we will see a significant further decline” with regards to home prices, as stated in n interview in CNN’s State of the Union show.

Although prices are steadily rising in the real estate market, it is still yet to be seen whether the rise will be significant enough to be considered as a strong recovery. The National Association of Realtors also mentioned that there are now more pending contracts to buy existing homes. The number would even be greater if banks and other lending institutions would return to their normal standards, and allow credit worthy individuals to take on a loan.

So what does this mean to all of us? First of all, home and other property owners will now begin to see the light with regards to their biggest investment. And they can rejoice for the predicted increase in value of their homes. On the other hand, new home buyers will also be faced with higher mortgage rates and increasing prices of properties. This can only mean one thing, if you want to buy a property, now would be the best time to do it. It may take a while for the market to recover, but it’s already on it’s way there. Better start while you’re still ahead.


What You Should Know About Adjustable Rate Mortgages

Dying to move out of your apartment and into your first home? Getting a home loan can help you achieve your dream. However, when purchasing a house, it’s important to know about the ins and outs of the mortgage you’re planning to get.

One important factor that must be considered is the interest rate on the mortgage. Banks and mortgage companies usually have different payment schemes to entice buyers into getting a loan. Some of these loans might be structured in such a way where borrowers will pay only a little in the beginning, but will be obligated to pay more in the end. One such loan is the adjustable rate mortgage.

Adjustable rate mortgages or ARM’s are common in different banks and financial groups. This type of mortgage has interest rates that are based on an economic index. Common indexes are one, three or five-year Treasury securities. Aside from the index, the mortgage is also subject to the lender’s margin or markup. Lenders will place an additional amount to the index to profit from the loan that you’re getting.

An ARM has an adjustment period between potential interest rate adjustments. This period can differ in various ARM’s. You might notice ARMs being described as 1-1, 3-1, or 5-1. The first figure represents the period where your interest rate will stay the same as the first you got the loan. The second number represents how often an adjustment will be made after the initial period has ended. In the examples given, the second number means that rates will adjust annually.

Buyers who are not familiar with how an ARM works can be attracted by the initial rate of the mortgage which may seem very low compared to fixed rate mortgages. However, what they don’t know is that some indexes can be very volatile, resulting in frequent changes in interest rates after the adjustment period. This can subject buyers to having to pay higher interest rates than they are used to, getting them in a financial fix when it’s time to pay up.
Although ARM’s are not very advisable to the usual home owner, it does have its uses. ARMs are a good option for those who are planning to sell their home within the first few years. This could also be an option for those who are expecting an increase in salary or income in the near future. Real estate dealers who sell houses within months can also benefit from this type of loan.

If you’re determined to get an ARM, it’s important to check three things. The first is the index. Look for an index that has remained fairly stable in the past five years. This will give you an idea of what range your future interest rates will be. Second, check how much the margin is. Third, look for a lender that has excellent customer service and request for a full disclosure on the terms of the ARM. It’s always best to be informed before signing that contract.

Remember that although ARM’s might have juicy initial rates, these rates can (and will) go up as time passes. Get an ARM only if you’re certain that you can pay up on future rates.