Adjustable Rate Mortgage
Considering An Adjustable Rate Mortgage?
Here are some things to think about…
Adjustment period: A short adjustment period means you start paying more interest as soon as rates rise. The longer the adjustment period, the longer you’ll continue to pay at a lower rate, which saves you money every month. One year is standard for most ARM’s.
Caps: These are the highest rates the interest can reach with each adjustment and over the life of the mortgage. Caps protect you from paying sky-high interest. Look for a low cap. Two points per year and six for the life of the loan is standard.
Closing Costs: There are a number of costs associated with taking a mortgage. We’ve provided a list of them below.
Floor: This is the lowest the interest rate can go. Floors protect the bank by guaranteeing them a minimum return.
Index: If the index your ARM is pegged to is at 5%, your interest will be several points higher and will change when that index does. The current rate for one-year Treasury securities is the index most banks peg their ARM to, but other indexes are also used. A low index doesn’t always mean a low interest rate, though, because some the margin may be higher between the index and the interest rate offered.
Interest Rate Trend: Research interest rates over the past two years. If they have been going up, you’ll probably have bigger payments in the near future. If they have been going down, your payments will probably also decrease.
Introductory Rate: Many lenders offer a lower interest rate during the first two or so years. The interest rate then rises to the level used for the remainder of the term of the loan. A low introductory rate saves you money. It is especially attractive if you plan to sell your home within the first 3 years of ownership, as many families do.
Margin: The margin is the difference between the interest rate of the index your ARM is pegged to and the amount of interest you pay. The higher the margin, the more you pay.
Payment Limits: Payment limits protect you because they limit the dollar amount the payment can increase from one adjustment to the next. This helps ensure that you won’t be hit too hard by a sudden leap in interest. The tighter your budget, the more you’ll want a low payment limit.
Prepayment Penalty: Look for a loan with no penalty if you pay it off early.
Term: The length of the loan. you’ll be paying more per month for a 15-year mortgage, but you’ll pay it off faster than a 30-year mortgage and pay less overall.