Assessing an Adjustable Rate Mortgage

When a homebuyer is looking into an adjustable rate mortgage, it is not uncommon for lenders to try to sell the borrower on one aspect of the loan while ignoring the points that really should matter. If you want to ensure you are getting the mortgage that’s best for you, there are a few things you need to know and some questions you have to ask.

COFI, Libor and MTA

When a mortgage broker starts talking jargon with words like COFI, Libor and MTA it can be quite overwhelming. What you need to know about these terms is that they refer to the interest rate index the loan uses. While the index of a loan is definitely an important factor, it is by no means the only thing you should base your loan decision on.

Initial Rate Period and Adjustment Periods

In addition to paying attention to which index an adjustable rate mortgage is linked to, you should look into the mortgage’s initial rate period. The longer the initial rate period, the longer your initial rate will be locked in. Also look into the subsequent adjustment period. The further apart adjustments are, the less havoc they can wreak.

Fully Indexed Rate

It is also important to know the most recent index value and margin. If an index has a current value of 3 percent and a margin of 2.75 percent, the fully indexed rate is 5.75 percent. If the index changes during adjustment periods, your interest rate will change as well. For example, if the index’s rate goes up to 4.5 percent from 3 percent, the fully indexed rate will go up to 7.25 percent.

Rate Adjustment Caps

Rate adjustment caps play an extremely important part in an adjustable rate mortgage decision. The rate adjustment cap limits the amount an interest rate can change at any given time. Rate adjustment caps usually range from one percent to five percent.

Maximum Interest Rate

In addition to rate adjustment caps, the maximum interest rate is an important part of an adjustable rate mortgage. The maximum interest rate is the highest interest rate allowed on the ARM over the life of the loan. The maximum interest rate can vary drastically from loan to loan, so make sure you are getting a loan with the lowest maximum interest rate possible.

Article by Yon Olson, President of Accelerated Capital, Inc. – A Bend Oregon loan and mortgage company specializing in home and commercial real estate loans for all credit types. Call Yon at 541.617.0876 or visit us online for your Bend Oregon mortgage http://www.acc-cap.com/

Adjustable-Rate Mortgages vs. Fixed-Rate Mortgages

By Yon Olsen

Adjustable-Rate Mortgages vs. Fixed-Rate MortgagesBy Yon Olsen
Many people have a hard time choosing between an adjustable-rate mortgage and a fixed-rate mortgage. It’s not hard to understand why someone would be concerned. Do you opt for the lower up-front rate and hope for the best in years to come or do you go for the always-safe fixed rate that never changes? The answer to the question actually depends on your specific needs and circumstances.

Let’s say you’re purchasing a home that you only plan to stay in for one or two years. An adjustable-rate mortgage offering a lower initial interest rate than available fixed-rate mortgages would make more sense. However, if you plan on staying in the home for the rest of your life, an adjustable-rate mortgage can be quite a gamble. As people who took out adjustable-rate mortgages during the lending industry’s record lows a few years back can tell you, interest rates can skyrocket at the drop of a hat.

The best way to figure out whether you should choose an adjustable-rate mortgage or go with a fixed-rate mortgage is to estimate what will happen to the loan’s interest rate and payments in specific scenarios. By calculating worst-case scenarios, you can see if you would be at risk of losing your home should interest rates spiral out of control. Calculating “what-if” scenarios can also help you determine if a fixed-rate mortgage would actually give you a lower monthly payment than your adjustable-rate mortgage if interest rates take even a slight hike.

Let’s say you were buying a long-term home for $250,000 and you were thinking about taking out a 3/1 ARM with an interest rate of 5 percent but that rate would only hold for three years. After that three-year period, the rate would fluctuate according to the Treasury index plus a margin of 2.5 percent. On the other hand you could take out a fixed-rate mortgage with a 6.5 percent interest rate. What should you do?

You can take the adjustable-rate mortgage, but if your interest rate goes up just one percent a year, five years after you buy your home you’d be paying more for the adjustable-rate mortgage than you would have paid had you taken out the fixed-rate mortgage.

In the above scenario, a $200,000 30-year ARM with an interest rate of 5 percent would cost you approximately $1,075 a month. If that interest rate increases by just 1 percent during the first adjustment period, your monthly payment will jump to approximately $1,190. If the same thing happens at your next adjustment, your payment amount goes up to more than $1,300. One more time and your payment is already at about $1,430 a month. To make matters worse, the amount of your payment applied to principal is going down and the amount applied to interest is going up. If you would have opted for the fixed-rate mortgage with a 6.5-percent interest rate, your payments would have stayed at a steady $1,264 a month. Not a pretty situation.

While an adjustable-rate mortgage may be a better choice for short-term home purchases, people who plan on living in their home for many years to come may want to avoid the “what if” scenario and opt for a fixed-rate mortgage.

Article by Yon Olson, President of Accelerated Capital, Inc. – A Bend Oregon loan and mortgage company specializing in home and commercial real estate loans for all credit types. Call Yon at 541.617.0876 or visit us online for your Bend Oregon mortgage http://www.acc-cap.com/

Welcome to Bend Oregon Mortgage Update BLOG

Central Oregon, and especially Bend, is among the few areas nationwide that are still enjoying robust growth in real estate sales and property values. If you live in Central Oregon, or are considering locating or investing here, you will find this BLOG a big help in your efforts to keep abreast of the latest happenings. So, WELCOME to BendOregonMortgage.blogspot.com!

Please feel free to post your questions, answer other's inquiries, and leave any news or articles you come across in your own efforts to take advantage of this remarkable situation in our area.

I will be adding articles here ASAP, so keep checking back for more posts to keep you informed.

If you wish to contact me directly, my Email is acceleratedcap@yahoo.com.

Yon

P.S. I also have a website for my Accelerated Capital, Inc. - a Bend Oregon Mortgage brokerage. You will find additional news and articles there.