Adjustable-Rate Mortgages (ARMs)
If you are more comfortable in taking a risk with your money or if interest rates are very
high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the
solution for you. You might also choose this type of loan if your planned ownership of
the property is short-term or if you expect your income to increase to cover any poten-
tial risein the interest rate.
Generally, the interest rate when you take out your loan will be lower than a fixed-
rate mortgage. Please note that this is true initially, not necessarily long-term.
Since an ARM rate rises and falls depending on the prevailing interest rate, your
mortgage payment will rise and fall accordingly. If your income is not sufficient
tocover the highest possible payments, then this option is not for you. On the
positive side, the lower initial payments will allow you to qualify for a larger loan
than if you choose a fixed-rate. The downside is that your payments will increase
if/when the rates go up.
Typically, ARM interest rates are tied to a specific financial index (such as Certificate
of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFi, or LIBOR
[London Interbank Offered Rate]) and your payment will be based on the index your
lender uses plus a margin, generally of two to three points. Get the formula used by
your lender in writing and make sure you understand what it means.
Fortunately, the amount an ARM can increase is limited. There are "caps" on how much
your lender can increase your rate, both for a period of one year and for the life of the
loan. Plan ahead, and have your lender calculate what the maximum payment would be
if your rate went to the highest amount allowed by the cap for your particular mortgage.
If you are not confident you'll be able to pay that amount on a monthly basis, perhaps
you should reconsider this type of loan.
If neither the fixed-rate or the adjustable-rate mortgage seems like the best option,
perhaps the convertible ARM will be right for you. This alternative combines the
initialadvantage of an ARM with a fixed rate after a predetermined number of years.
Obviously,this type of mortgage has more advantages when the initial interest rate
is low and the future rate is not guaranteed.
Another mortgage option available to some people is a government loan, providing
that you meet the qualifications for these loans.
Veterans may qualify for a loan from the Veterans Administration. There is a limit on the
amount you can borrow, so this option works best for those buying a lower priced home.
The Federal Housing Association offers loans to lower-income Americans. Look for
the phrase "FHA approved" when looking at ads for homes.
Getting the Best Rates for Your Mortgage
Naturally, you want to get the best deal for the least amount of money. This holds
true for mortgage rates as well.A lower interest rate means a lower monthly mort-
gage payment, which can save you money in the long run. Also, it is easier to
qualify for a lower payment than a higher one.
You basically have two routes to finding the best rate. The first is to do all the research
on your own. The second is to use a mortgage broker.
With the advent of the Internet, much of this information is readily available online.
Once you have educated yourself sufficiently about real estate loans, all it takes is
the time and energy to sift through online resources to find the information you need.
Rates change quickly. That great rate you find today might not be there tomorrow. Once
you find the rate you are looking for, submit a loan application and lock in that rate.
When comparing loans, make sure that you're comparing loans of the same type.
For example, you find that "Loan A" for a 30-year loan has a much lower interest rate
than "Loan B" (also for 30 years). Upon further inspection, you find that "Loan A" is
technically an adjustable rate mortgage. Its payment is based on a 30-year amortiza-
tion, but becomes due through either payment or refinancing at the end of 5 or 7
years. These are frequently referred to as a 5-year or 7-year fixed-rate mortgage.
While both said "30-year", they are not the same type of loan.
Ask the lender for a statement detailing all fees associated with the loan. Factors such
as "points" (loan fee), interest rate and "garbage fees" (extra fees which some lenders
charge) can vary greatly from one lender to another.
If you do not have the time or experience to "do it yourself," look for a qualified
mortgage broker that can assist in finding the right mortgage for you. Ask friends
and associates whohave refinanced or purchased recently if they have a broker they
can recommend. You'll wantto find a broker who is energetic, flexible and knowledge-
able about finance and loans and someone who has your best interests in mind.