An ARM is a mortgage that has an interest rate that adjusts
periodically, often every six or 12 months. At these intervals, the
interest rate is adjusted using an index and a margin. The index is
a financial index that is used to gage general interest rate
trends. Treasury Bills (T-Bills), Certificates of deposit (CDs),
The 11th District Cost of Funds Index (COFI), and others are
examples of financial indexes that are often used to determine
interest rates. The margin is the markup that the lending
institution places on their loans; put bluntly it's the cost that
they charge borrowers to use their money. The index is then added
to the margin resulting in the interest rate the borrower pays.
Laptop Battery With a brief explanation of the ARM laid out above, the
following is a list of both advantages and disadvantages of
financing a property using an ARM.
Fixed rate mortgage Adjustable rate mortgage Interest only mortgage What may have been right for you years ago, might not be the best mortgage for you today. Mortgage refinancing can change that adjustable rate mortgage to a fixed rate mortgage for the life of the loan.
Thinkpad ADVANTAGES
You want to change from an adjustable rate mortgage (ARM) to a fixed rate mortgage, which you can do by refinancing. You are going through a divorce and you want to refinance your home mortgage loan rate to get your spouse¯ name off the mortgage papers. You need to raise money for home improvements, to purchase household equipment, or to send a child to college. You want to consolidate your debts.
Microsoft 1.) Saving Money - An ARM's initial interest rate is
always lower than the interest rate of a similar-term fixed
mortgage. If the borrower can financially afford the risk of future
rate increases, then it may make since to get the ARM and save
money by paying a lower interest rate. ARMs usually have a lower
rate than fixed mortgages for approximately one to two years before
the ARM's rate increases propel it higher than the fixed rate (if
mortgage rates are increasing).
Price comparison website Moneysupermarket believes many fixed mortgage rate products still offer mortgage holders mortgage rates of lower than 4.5 per cent. "However, if fixed rates continue to get any higher, a tracker mortgage may be a better alternative, " says the website's head of mortgages, Louise Cuming. year tracker mortgage, Moneysupermarket found that the fixed rate mortgage had a slight advantage of 3 for the mortgage term.
Laptop Computers 2.) Rates are Currently High - If rates are currently
through the roof, then an ARM makes since if one is betting on
dropping interest rates. By getting an ARM when rates are high, the
borrower takes advantage of two things. First, if the interest rate
starts to fall, so will the borrower's monthly mortgage payment
without them having to refinance. Secondly, the borrower profits
for the first year or two because the teaser, or initial interest
rate, will be lower than that of comparable fixed-rate
mortgages.
J K L M N O P Q R S T U Top Abstract (of title) A written summary of the title history of a particular piece of real estate. Acceleration Clause A provision of a mortgage or note which provides that the entire outstanding balance will become due and payable in the event of default. Adjustable Rate Mortgage (ARM) A mortgage in which the interest rate is adjusted periodically, based on the movement of a financial index.
Laptop Computer 3.) Assumability - Often an ARM contains assumability;
the ability for the loan to be "assumed" by the new buyer of the
property from the current owner of the property/loan. This is a
huge benefit if interest rates are high because the ARM will shift
down with the interest rates after the rates peak and start to move
downward. By assuming the old owner's ARM, the new owner saves
themselves from getting pinned down with a ridiculously high fixed
rate mortgage that will have to be refinanced if rates drop.
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Desktop Computer 4.) No need to Refinance if Rates are Dropping - Fairly
self-explanatory, the owner of an ARM does not have to refinance
their mortgage if interest rates are dropping. Instead, their
monthly interest and overall payment will drop at each scheduled
rate evaluation. If the borrower had a fixed-rate mortgage, they
would have to qualify and pay to have their loan refinanced to a
lower rate.
Notebooks DISADVANTAGES
Lenovo 1.) Negative Amortization - Put very, very simple, the
monthly mortgage payment of the ARM has a cap on it, but the
monthly interest rate increase does not. If one has a $500.00 max
monthly payment and is currently paying $500.00 their payment is
maxed. At the same time, if the loan's rate is evaluated and
increased by 1% per month, this 1% is not added to the monthly
payment of $500.00, because it is already at the monthly maximum
payment. This means that each month 1% will be added to the ARM
balance, thus every time one pays their monthly mortgage payment
the loan balance is actually increasing. Put simple, the mortgage
has essentially turned into a
credit card.
Hard Drive 2.) The Teaser Rate - The teaser rate is the initial
monthly interest rate that is advertised for the ARM. This rate is
lower than the interest rate found on a comparable fixed-rate
mortgage, but not for long. After a term lasting anywhere from a
couple of months to a couple of years, the teaser rate disappears
and often the interest rate of the ARM has surpassed that of the
fixed-rate mortgage. If one is prepared this is not a huge deal and
is even expected by the borrower. But the trouble here lies within
the fact that often inexperienced borrowers are the ones that most
often fall for the teaser rate, not aware that the rate will not
last long. When considering an ARM, don't evaluate it based on the
teaser rate; rather use the index that is used for adjusting the
ARM and the margin that the loaning institution requires. See the
top of this article for an explanation of the loan's index and
margin.
Travelstar 3.) Rates are Low and going Up - Sound familiar? It
should, this is the situation that the United States currently
faces. Many people are currently using ARMs to speculatively
purchase
homes and then resell them for a
profit before the interest rate increases, thus creating the
infamous United States
real estate bubble that everyone
is talking about.
Gateway Don't fall into this trap! With rates currently low and rising
every time the Federal Reserve meets, borrow a fixed-rate mortgage
when purchasing a property. This ensures that as interest rates
continue to increase, the borrower's monthly payment will not. It
also eliminates the need to refinance the loan after rates have
increased significantly.
Laptop Parts The author is the founder and owner of
LandLordDocuments.com
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