Title:
Adjustable Rate
Mortgages: This Home Mortgage Loan May Not Be For The Weak At Heart
Word Count:
875
Summary:
I heard the news
about another interest rate hike and thought it was about time to look into
refinancing my mortgage. I contacted my mortgage company first.
Keywords:
Adjustable Rate
Mortgage, Bad Credit Mortgage ,Home Mortgage
Article Body:
I heard the news
about another interest rate hike and thought it was about time to look into
refinancing my mortgage. I contacted my mortgage company first.
"I am interested in a fixed mortgage rate." I said.
"May I ask why that is?" The broker asked politely.
"I don't want to deal with the risk of rising interest rates. At my age, I
cannot afford the risk.”
"Looking at your last ten years of history, you have done pretty well with
the adjustable rate. In fact, you had paid less in interest than most people
with a fixed loan. May I suggest that we look at some adjustable rates, which
are even less than the rate you’re paying and with caps you don’t have to worry
about the interest rate hikes. I think we can save you a few hundred dollars
off your monthly payment."
At this point the broker took a breather so that I can say, "No thank you.
I am only interested in a fixed rate mortgages." "I don't understand.
Are you not interested in saving money?" He asked before launching into a
lecture that had a mix of economy 101, budgeting 1, a dash of fortune telling
and a healthy and totally unrealistic optimism of future trend in interest rates.
When he was done I explained to him that I recall the 18%-19% interest on
mortgage loans in the early 1980's that he seemed too young to remember. I
pointed out that on a $100,000 loan, the 18% interest is $1,500 per month on
the mortgage interest alone. If you have a $200,000 loan the interest alone
would be a back-breaking payment of $3,000 per month.
I knew he thought I am out of my mind thinking about an 18% mortgage interest
rate in today’s environment. At the end we ended the phone conversation without
any resolution. The gap in understanding wasn’t about fixed rate mortgages vs
adjustable rate mortgages (ARM). The gap was in age, experience, expectation,
hopes and fears; a gap too wide to bridge.
To understand this gap, let’s look at the adjustable rate mortgages. This type
of mortgage loan is usually lower than the fixed rate and the lower rate means
lower payment that in turn means easier qualification.
When lenders are considering your mortgage loan application, they look at what
percentage of your income is available for repaying their loan. With an income
of $5,000 per month, a $2,000 loan payment is 40% of your income and a $1,000
payment is 20% of your income. The closer you get to $1,000 or 20% of your
income, the easier it is to qualify for the loan. This easier qualification
appeals to younger people who are just starting and those with income
limitation.
Adjustable mortgage rates appeal to young people with an innate optimism, hopes
of increased income and the high possibility of moving to a different home in a
short period of time. They need to look at what they can afford to pay and
cannot worry too much about the distant future. To them anything is better than
renting which is absolute waste of money.
There are also those older individuals who have suffered from some set back in
life and do not enjoy a high credit score or do not have a very high income.
Since a poor credit score increases the interest rate a bank offers to
potential borrowers, a fixed rate may be too high for these individuals to
consider.
Let’s take a look at some terms that help you understand ARM better.
Margin - This is the lender's markup and where they make their profits. The
margin is added to the index rate to determine your total interest rate.
ARM Indexes - These are benchmarks that lenders use to determine how much the
mortgage should be adjusted. The more stable the index is the more stable your
adjustable loan remains. Consider both the index and the margin when you are
shopping around.
Adjustment Period - Refers to the holding period in which your interest rate
will not change. You will come across ARM figures like 5-1 that means your
mortgage interest remains the same for five years and then it will adjust every
year.
Interest Rate Caps - This is the maximum interest a lender can charge
you.
Periodic caps - The lenders may limit how much they can increase your loan
within an adjustment period. Not all ARMs have periodic rate caps.
Overall caps- Mortgage lenders may also limit how much the interest rate can
increase over the life of the loan. Overall caps have been required by law
since 1987. Payment Caps - The maximum amount your monthly payment can increase
at each adjustment.
Negative Amortization - In most cases a portion of your payment goes toward
paying down the principal and reducing your total debt. But when the payment is
not enough to even cover the interest due, the unpaid amount is added back to
the loan and your total mortgage loan obligation is increased. In short, if
this continues you may owe more than you started with.
Negative amortization is the possible downside of the payment cap that keeps
monthly payments from covering the cost of interest.
As you compare lenders, loans and rates remember Henry Moore who said,
"What's important is finding out what works for you."