Adjustable Rate Home Mortgage
When shopping for an adjustable rate home mortgage, a borrower should continue asking questions until he or she fully understands the mortgage process and the particulars which apply to one's own loan. Often, buyers are intimidated by their lack of knowledge about this complex process. Unfortunately, zealous salespeople can sometimes steer customers into accepting loans which they do not understand. Worse, these financial agreements may not represent what is best for the buyer's situation. However, with a bit of research before signing, a buyer can approach lenders with confidence and emerge with the best of adjustable rate home loans.
Attitude is important when beginning the mortgage process. Remember, lending institutions need business every bit as much as the borrower needs a loan, so do not be apologetic about questioning the terms of a mortgage, as though one was needlessly taking up the lender's time or questioning the lender's integrity by requesting more information. If lenders are unwilling or unable to provide such information, perhaps it is time to look elsewhere. Deciding upon a mortgage is probably one of the most important financial decisions one is going to make. So go ahead and ask questions. A buyer has the right to know.
As to the complexity of the process of shopping for an adjustable rate home mortgage, it is true that there are many areas which need to be addressed. Before approaching a lender, it would be wise to be familiar with the terms involved in selecting a loan. At first this may seem like an insurmountable mountain of information. Yet it is necessary so that one can approach a lender with confidence. Also, things are not as horribly difficult as one may fear. Although there are a multitude of configurations in adjustable rate home loans, they usually deal with a limited number of key concepts. Once these are understood, the whole process becomes a lot easier to comprehend. As further encouragement, consider this passage from Proverbs 25:2 -- It is the glory of God to conceal a thing: but the honour of kings is to search out a matter.
Do some reading on the subject of home mortgages. An Internet search on this subject will yield plenty of articles about the adjustable rate home mortgage versus other loan products. As this material is digested, it may be helpful to take advantage of glossaries on the subject in order to understand concepts that are being discussed. These can add greatly to one's understanding of the articles' information. As this process continues, eventually the borrower becomes familiar with mysterious yet pervasive terms like rates, indexes, margins, caps, amortization and recasting. Such articles will also warn the inexperienced borrower about areas to consider before applying for adjustable rate home loans and offer hints to make the entire process more productive. The Federal Reserve even offers a mortgage checklist to use while comparing various mortgages. This is filled with many important areas to consider regarding each loan offering. The Federal Reserve also offers an on line publication specifically about the subject of adjustable home mortgages. All this information is available without spending a dime.
There are certain areas to especially note during the process of researching a loan. Interest rate is important, of course. Fixed mortgages will offer predictability in an uncertain environment. Adjustable home mortgages offer lower interest initially, which may allow one to qualify for a larger loan amount. If interest rates drop, the borrower might end up ahead of the game. However, if interest rates increase, the payment may soon adjust to an amount which may be out of the borrower's reach. Changes in interest rates or the housing market in general may leave borrowers owing more than they borrowed or stuck with a house which can not be easily resold in time to avoid higher monthly payments. This could lead to foreclosure. Caps (limits)are available on adjustable rate home loans to eliminate some of this uncertainty, but it would be wise to consider the effects of possible payment changes before they occur.
In an adjustable rate home mortgage, the interest is linked to a specific index. Often, these indexes are 1, 3, or 5 year Treasury securities, but they may be other economic indicators as well. Although the borrower can not demand that the lender use a certain index, he or she can note the performance of various indexes and choose a lender who uses the index that seems to have the most stable history. A margin is added to cover the lender's costs and add a bit of profit for his trouble. The margin is added to the index rate to determine the interest rate the borrower will be required to pay on the loan.
Pay attention to the adjustment period of the loan. The rate is reset (recast) after this period. On a 2/28 adjustable rate mortgage (ARM), the rate is fixed for the first two years, then adjusts periodically so that the loan will be fully amortized (paid off) over the following 28 years. Watch out for a drawback which can occur with some types of ARMs -- negative amortization. Certain payment options that an ARM offers may result in a monthly payment which does not cover the interest which is being added to the loan balance. Therefore, the balance is actually growing rather than decreasing each month. There is a certain percentage after which this is no longer acceptable (perhaps 110% or 125% of the loan amount). At this point the payment is reset to whatever amount will result in the loan being paid off in the years remaining on the loan agreement. This can result in significantly larger monthly payments, which the borrower may not be able to afford. Hopefully this last item underlines the point of this article: be sure to research and understand adjustable rate home loans before signing on the dotted line.
5 Year Adjustable Rate MortgageAdjustable rate mortgage loans involve a changing interest rate periodically based upon the criteria set forth in the contract. Normally variable interest continues to climb each time it changes. This is often done to allow the buyer to start off with lower interest and a lower monthly payment. Buyers are often unhappy when their payment periodically increases and often seek to refinance with a fixed rate because a rising payment may be difficult to make. A 5 year adjustable rate mortgage loan is done to ensure the lender obtains a steady amount of funding. Other types of loans include graduated payments, interest only, fixed rate, negative amortization, and balloon payment. Buying a home can be very stressful but when a person places his or her trust in the Lord, He will give peace and will help in making the difficult decisions. "Thou wilt keep him in perfect peace, whose mind is stayed on Thee: because he trusteth in thee" (Isaiah 26:3).
Each type of loan has basic features associated with it. Adjustable rate mortgage loans have beginning interest for a certain period of time. The amount of the interest resets according to the schedule set forth in the contract. Limits are usually set on how much the interest can increase each time and the time period set for the changes is also limited. Some contracts allow for the adjustable rate mortgage (ARM) to be converted to a fixed option at certain times. However, prepayment penalties may apply when an ARM is paid off early and may be a significant amount. Prepayment penalties are usually based upon a percentage of the total loan amount.
A graduated payment mortgage (GPM) has low monthly payments that gradually increase over time. People who usually decide on a GPM are ones that have a good idea that their income will increase as the payments do. Young people are often very confident that the outcome with a GPM is going to be positive but buyers may overestimate their individual earning potential and find themselves in a difficult situation in the future. A 5 year adjustable rate mortgage is similar to a GPM only the adjustments on the interest occur over a 5 year period and they are usually based upon the federal prime rate so they can vary more dramatically in comparison.
Interest only loans allow the buyer to pay only the interest for a certain amount of time so the principal balance remains the same. This allows the buyer to have very low monthly payments during this time. Adjustable rate mortgage loans do not have high interest in the beginning compared with an interest only loan. Lenders see interest only as a higher risk because buyers become discouraged from not building any equity in their home so they may find that refinancing is difficult. The benefit of an interest only option would be that the buyer can save the cash saved from having to pay on the principal and use it for other investments.
A fixed interest option means that interest stays the same over the life of the contract. The monthly payment is configured using the amount of interest and the length of the contract to come to a fixed payment amount each month that eventually ends in zero with the last payment made. Terms can begin at 15 years but the average time period for the contract is a 30 year option. A person may have an option of a shorter term or a longer term period. Fixed interest options are usually more expensive in the long run compared with a 5 year adjustable rate mortgage. Many people prefer having a fixed monthly payment so they know what to expect to have to pay each month. Fixed rate options do not usually have a prepay penalty associated with them.
Negative amortization usually occurs in loans where the payment amount is not enough to cover the interest. The unpaid accrued interest is added to the outstanding principal balance so that the balance increases by the amount of the interest each month. Adjustable rate mortgage loans may have a negative amortization for a certain period of time. One of the negative aspects of negative amortization options is that the payments can vary dramatically from one month to the next. Eventually the buyer will have to make full repayment according to the original agreement of the contract.
A balloon payment mortgage has a large payment due at the end of the loan period. The difference between a balloon payment option and a 5 year adjustable rate mortgage is that refinancing may be required at the end of the contract or period because the buyer can not make the payment. A balloon payment mortgage is used more for commercial real estate than for residential real estate. Many buyers use a balloon payment option because they plan on refinancing or selling their property before the large payment is due.
Variable interest mortgages are the most popular for homebuyers who know they are going to be moving within several years. These usually offer a lower fixed rate of interest for the first several years and then after that the interest will fluctuate affecting the amount of the payment. The longest amount of time that a variable interest option can be written is for ten years. These types of options are great for people who have jobs where they move often.