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/
posted by Yon Olsen @ 1:14 PM
2 comments
2 Comments:
Also remember that the rate on your adjustable rate mortgage is determined by some market index. Many adjustable rate mortgages are tied to the LIBOR, Prime rate, Cost of Funds Index, or other index. The interest rate cap structure provides some protection from large interest rate swings. Such rate would be good for bad credit mortgages if you have poor credit. There are two types of caps: (1) annual, and (2) life-of-the-loan. The annual cap restricts the amount your interest rate can change, up or down, in any given year, while the life-of-the-loan cap limits the maximum (and minimum) interest rate you can pay for as long as you have the mortgage.
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