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| Refinance - Get The Best Adjustable Rate Mortgage |
| Refinancing With An Adjustable Rate Mortgage (ARM) When you are ready to refinance your house, an adjustable rate mortgage could be the right loan for you. There have been plenty negative comments said in the last several months about ARMs. Some justifiably so. However, you are the one in control. You have to monitor and stay on top of the mortgage news and trends. Only you can pull the plug when the rates are moving against you. Cap the rate You must be sure there is a cap on the rate. Otherwise it could double or triple. The cap works on either end of the scale. At the top end, it specifies the highest you will have to pay. For example, your rate could be capped at 8.5%. Or it could have a cap on the low end of 3.5%. The high end protects the borrower and the low end protects the lender. Teaser rate Know when the teaser rate ends. Lenders issue tease rates to entice homeowners. If you think it is too good to be true, you are right. When rates on the market are 4.5% to 6.5%, and a lender offers you 1.5% or 2.5%, then you know something is amiss. Realize that this rate is not for the duration of the term. Read your contract carefully. Be direct and ask the lender to specify in the contract the date that the teaser rate ends. Conversion to a fixed rate To option of converting your ARM into a fixed rate mortgage should be in your loan contract. If you are dealing with Freddie Mac, one of their ARMs allow you to convert without a penalty in year 2 and beyond. The first year is entirely a lock out. With a different ARM they charge a penalty in year one of 3%, year two 2%, and there is no penalty in year four. This is an area of your mortgage contract that you need to spend lots of time and ask questions until you are blue in the face. ARMs are complex mortgages. They can be thought of as designer mortgages. You tell the lender what you want in a mortgage and he would put together the whole package. Index Most lender tie their adjustable rate mortgage to an index. You must learn a little about the common indexes. The three that are prominent in the news are, the Prime Rate, the Constant Maturity Treasury (CMT), and the LIBOR. LIBOR indexed ARMs are most likely what your lender is offering. LIBOR stands for London InterBank Offered Rate. It is the interest rate at which banks offer to lend each money on the wholesale money market in London. Its changes are smaller than the changes in the prime rate. For the week of February 10, 2010 the 1 year libor rate was 0.84%. One month ago the rate was 0.96%. The CMT index is volatile and moves with the market. It is the weekly or monthly average yield of U.S. Treasury Securities. It reacts quickly to changes in the general economy. The Prime Rate is the rate that commercial banks charge their best customers. The prime rate is a lagging indicator. For example if the monthly employment figures are low, the primate rate will have a negative response. However, the rate would not change for another two or three months. Margin An adjustable rate mortgage has two parts to it. One is the index, and the other is the margin. The index is the part that moves up and down depending on conditions in the financial markets. The margin stays the same. You need to keep the margin below 3.0%. If the lender proposes a higher margin, counter by asking for a longer term for your teaser rate. Adjustment date The ARM resets several times over the term of the mortgage. The interest adjustment date is very important because it affects your mortgage payments. Typically the interest adjustment is coupled with a cap. For example, interest adjustment made every 6 months, with a cap of 0.75% per cap, and a total cap of 1.50% for the year. Summary This is a lot of information to digest and then try and mix it all up in to a mortgage contract. Focus on the basics.
In closing, we would like you negotiate every point. Educate yourself, and shop around. |
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| Adjustable rate mortgages are making a comeback. As of June 30, 2011 the rate was at a record low of 3.22% for 5 years. Gone are the fancy creative loans that got us into the housing mess. What you get now is plain vanilla ARMs. No frills. Watch slideshow. |
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