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Why Choose an Adjustable Rate Mortgage?

February 6th, 2011 . Posted in Home mortgage | No Comments »
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Adjustable rate mortgages (ARMs) are appealing to many homebuyers, but what are the risks?

An adjustable rate mortgage is one in which the rate changes based on the market interest rates. The rate will adjust on a specific schedule, say once a year, after an initial fixed period. Fixed periods range from six months to five years. Some may have even longer fixed periods.

The risk in an ARM comes from having a payment that can change significantly. When you have a fixed rate mortgage, you know that your payment will be the same now, ten years and twenty years later. The payment doesn’t change because the interest rate is fixed.

When you choose an adjustable rate mortgage, you accept the risk of a rising payment in return for a lower initial interest rate. This rate is usually much lower than the market rate for a 30-year fixed rate mortgage. The more risk you accept, the lower your initial interest rate. The more adjustments the loan will go through, the more risk. The traditional thinking is that even after a loan adjustment, the rates will be lower than those offered to new borrowers for 30-year fixed mortgages. However, it does happen where this gap closes, especially in periods of rising interest rates.

The best time to get an ARM is when interest rates are on the decline. Despite the risk, an ARM can be beneficial to certain borrowers. While most advisors will tell you that a fixed-mortgage is the way to go in every situation, there are times when you should consider an adjustable rate.

1. The borrower needs extra cash for a while.

A lower initial fixed rate gives you more money in your pocket early in your loan term. For example, a one-year ARM with a 30-year term and a rate which adjusts once a year on the anniversary of the loan date comes with zero points and an initial rate of 5.625%. Let’s compare that to a 30-year fixed rate mortgage with no points and a fixed rate of 7.625%.

If you take out a $240,000 mortgage, the 30-year fixed rate payment would be $1,698.70 each month. The one-year ARM would have a monthly payment of $1,381.58. That’s a difference of $317 a month.

You could use that extra $317 to pay off your credit cards, make improvements to the home or save for retirement. But you want to make sure that you will maintain a lifestyle that can afford for your payment to increase. You don’t want to find that you cannot afford a higher mortgage payment when the rate adjusts upwards.

2. Buy more home.

Because of the lower initial interest rate, you can qualify for a larger mortgage amount and a more expensive home. Many homebuyers secure a one-year ARM with the purpose of refinancing them later. The low rate allows a more costly home, but a low mortgage payment. But remember that refinancing comes with closing costs. Do the math to see if you are really saving any money.

3. It all depends on the future.

If you plan to move or upgrade in the next few years, an ARM is a wise decision. You can benefit from a lower rate mortgage and simply sell the home and buy another before the rate adjusts. For example, if you plan to move in three years, why not go in for a five-year adjustable mortgage. You get a lower rate that won’t adjust while you own the home, as long as you sell during the initial rate period.

Make sure that the loan comes with no prepayment penalties. Make sure that you do some math. If interest rates go up drastically in those three years, when you buy a new home, you will be facing the higher interest rates. This could mean that you are unable to really upgrade to a larger or more expensive home.

Adjustable-rate mortgages are basically all about weighing the risk. You are getting a lower interest rate and payment for taking the risk of having to pay a lot more in the future. Some homeowners are experiencing this right now as foreclosures are on the rise. Many homeowners failed to calculate how much their mortgages could adjust to. Some have seen large increases that they are unable to afford. Do all of the math and always prepare for the worst case scenario when considering an adjustable rate mortgage.

Who Wants Low Mortgage Rates?

January 30th, 2011 . Posted in Home mortgage | No Comments »
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Who doesnt want low mortgage rates? A low mortgage rate means spending on monthly payments during the course of a mortgage. A low mortgage rate can save homebuyers like you several thousands of dollars. A low mortgage rate means having more funds to spend on investments that might prove profitable.

Despite the reported increase of previously low mortgage rates, rates today are still low enough to consider a mortgage refinance for your home. The Internet provides you with the perfect portal to start applying for those low mortgage rates. Below is a list of websites where you can apply for low mortgage rates.

Low Mortgage Rates at Interest .com

Interest.com offers you an opportunity to compare rates of several lending companies in your state so you can have a better chance at getting a low mortgage rate. For instance, you want to apply for a low mortgage rate on a 30-year fixed rate refinance mortgage in Georgia. The amount you wish to borrow is $100,000 with no discount points and a standard loan type. After clicking on the search button, the page will display the low mortgage rates of several lending companies in Georgia, including Sterling Home Mortgage Corporation whose low mortgage rate is 5.375%. There are several other lending companies that offer low mortgage rates and all you have to do is choose the one offering the lowest rate.

The Low Mortgage Rates of MortgageRatesUSA .com

Mortgage Rates USA is yet another company that offers choices and options for costumers who are on the look out for low mortgage rates. Their online low mortgage rate quote request is free and secure. The information you provide so the website could generate your low mortgage rate quote request is only shared with the lender and not with any third party.

The Low Mortgage Rates of ELoan .com

E-Loan is one of the top lending companies offering low mortgage rates. The reason for their low mortgage rates is that they do not charge you with any lender fees or any other hidden costs which is the main culprit to an increased mortgage rate. For example, a 5-year adjustable rate mortgage with E-Loan has a low mortgage rate of 4.625% and an APR of 5.078%.

How to take advantage of low mortgage rates

Refinancing is something that all homebuyer should consider when the market offers low mortgage rates. When you refinance, you take advantage of low mortgage rates by paying off your first mortgage with a new mortgage with low mortgage rates. This move can help you lower down your monthly payments and save on your overall interest bill.

For example, you have a year into a $150,000 loan for 30 years. The interest rate is 8.5 per cent and fixed for the duration of the loan period. You can refinance your first loan with a new 30-year loan with a low mortgage rate of 7 per cent. By doing this, you can cut down on your monthly payment by $155 to $998. The low mortgage rate of the new loan can also help you reduce your overall interest bill by $42,200 to $223,000.

Whats The Mortgage Rate?

January 23rd, 2011 . Posted in Home mortgage | No Comments »
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A mortgage rate is the amount of interest that you will pay for your home purchase. If you are in the market for purchasing a home, then you know that there are many deals to be had. There are many various companies offering low cost financing and low rates. But, what are they really offering and what should you really choose? The interest that is on a home is the cost that is charged, on a monthly basis for using borrowed funds to pay for the homes purchase. This rate is the price tag of your home loan, so to speak.

The number is a very tricky little number though. It does not remain the same for very long. In fact, at any time, there are many various rates that are charged to consumers from the same institution as well as between various ones. The mortgage rate is a very important number too. Because it is the cost that you will pay to purchase your home above the principal value of the home, you need to insure that it is the lowest percentage possible. You should shop around for the most ideal rate out there for your specific needs.

T

he first thing to understand is that there are many mortgage rates being offered at any one time. From one lender, you will find several options for various types of loans. This can make things very confusing to most that are looking to just purchase a home. Yet, there are many ways to find the right overall cost of the loan for much less. One thing to do is to use a loan calculator to help you to secure the lowest rates. This can break it all down and tell you just what your monthly payment will be as well as just what you will pay, in the long run, for your home loan.

Now, there are other factors that play into the mortgage rate that you can get as well. This includes the credit score that you have. The more risk a choice you are as a borrower, the more costly a home will be to you in interest. The best way to keep this from hurting you with high charges is to keep your credit rating as high as possible. Pay off bills on time, pay down debt as much as possible and keep your debt to credit ratio on the right track and you will have many more benefits to lower interest.

There are many other things that play into this interest percentage. Because a home purchase is the most costly of the purchase you are likely to make, you will need to keep your costs down as much as possible. When there are many products to choose from, it can be hard to see which is the very best of options. Yet, when you use things like a loan calculator to help you to figure it all out, it is easy to see what the right choice is. Luckily, there are enough options in mortgage rates that everyone can find something that is well suited to their needs.

What Do Interest Rate Hikes Mean For Your Mortgage?

January 9th, 2011 . Posted in Home mortgage | No Comments »
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If you’ve picked up a newspaper or caught the news recently, you’ve probably encountered a story about mortgage rates and the Federal Reserve banking system. Like many borrowers, you might wonder how the Fed determines interest rates and how – in the event of a rate hike – your personal finances could be affected. Here’s a quick overview:

Banks, credit unions, and other lending institutions borrow money from Fed banks. Since they borrow these funds on a short-term basis, the institutions are charged at a discount rate that is set by the Federal Reserve Board. This discount rate has a direct effect on the “Prime Interest Rate,” the rate banks charge their top-rated commercial customers for short-term loans.

The Fed’s board of directors meets each month to set financial policy, adjust interest rates, and provide an economic forecast for the future. Since June 2006, the Fed has raised interest rates several times, a move designed to stabilize the economy that could translate to tighter cash-flow in your household. If you are juggling a mortgage, a home equity loan, and any amount of credit card debt or personal loans, this is probably a good time to assess the potential damage and, if necessary, refinance your existing mortgage.

Fixed-rate Mortgages

True, a 30-year fixed-rate mortgage may not be the most revolutionary option, but, in many cases, it is the smartest one. While the introductory rate on an adjustable-rate mortgage will probably be lower, payments on a fixed-rate mortgage won’t fluctuate, even if the Fed decides to increase the discount rate. For borrowers who want stability and are not planning to move within 5 – 7 years, the fixed-rate mortgage makes sense.

Adjustable-rate Mortgages

The chief advantage of an adjustable-rate mortgage or ARM is that the initial interest rate may be lower than that of a fixed-rate mortgage. However, the fact that your rate is adjustable means that you will likely see higher rates and bigger monthly payments, somewhere down the road. Some ARMs adjust on a monthly basis, but most adjust every 6 – 12 months, using a financial formula based on economic factors like federal interest rates.

Hybrid ARM

Many borrowers opt for the hybrid ARM, a mortgage that typically carries a low fixed rate for a set period of time (common hybrids are 1/1, 5/1, and 7/1), and thereafter has an adjustment interval of one year. Those annual adjustments are tied to federal rates. If you planning to live in your home for just a few years, the low introductory rates on a hybrid ARM might be a good bet, but beware the rate fluctuations to come.

What is an Adjustable Rate Mortgage?

January 2nd, 2011 . Posted in Home mortgage | No Comments »
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One familiar type of home loan would be the adjustable rate mortgage or ARM. This is a type of loan that the interest will go up and down depending on the six real estate indexes.

The interest rate will change because the lender can get the proper margin. This is due to the fact that the indexes will decide the cost of the funding that the loan needs in the beginning.

Your lender is going to take a little bit of an interest risk with the adjustable mortgage. This type of loan is good if the interest on your loan is falling for a long time.

You do not have to worry that much about the interest rates even if they do jump excessively. There are limits to how much your payments can increase.

The limits are known as caps and they are there so that no matter what the size of the jump of interest is, you will not ever have to pay more than a certain increase in a time frame.

One example is if a lender gives you an adjustable rate mortgage and it has a one percent cap on it for any six month time period. It may also have a four percent total cap for the entire loan.

Your payments might increase as much as four percent but that is the most it can until the loan is paid in full. This is a not such a bad idea.

There are different interest rates in different parts of the country. You need to do your research so that you know what to expect.

The newspaper will most likely have the interest rate predictions so that you can keep a close eye on what your interest rates are doing.

Variable Rate Mortgages Setting The Standard

December 26th, 2010 . Posted in Home mortgage | No Comments »
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Heres the first mortgage term you should learn Standard Variable Rate, or SVR. This is the interest rate you will be paying on the total amount you are borrowing. It is usually expressed as a percentage, and is different from an APR (Annual Percentage Rate). An APR includes all costs associated with the loan, such as interest, fees, any compulsory insurances etc.

While interest rates can vary quite widely across the board, all lenders will have a Standard Variable Rate. Its the default rate for their mortgages, and can provide a good indication of whether they are offering good deals. Comparing different lenders SVRs is one way to get an idea of who has lower rates generally though there will be exceptions to this rule.

This rate fluctuates, going up or down according to the economy and the lender. The biggest factor that effects SVRs is the Base Rate set by the Bank of England. In recent years this has been kept relatively low, and mortgage interest rates have been particularly good for borrowers. However, this could change and you should bear in mind that rates could go up in the future.

Many mortgages start off with special introductory rates, and then revert to the SVR after a set period. These include capped and collared mortgages. There are also fixed rate and interest only mortgages available, which are covered in more detail further on in the guide. When considering mortgages with special introductory rates, you should also take into account what the SVR is likely to be once your initial period is over. Many mortgages come with the condition that you stick with the same one for several years, even after the special offer period is over. There will often be penalties if you want to change mortgage within this tied period.

Interest calculation, interest charging

Be aware that there is a difference between interest calculation and interest charging. Some mortgages calculate interest daily, which works out as fairer for the borrower as your overall balance is reducing every month, and therefore the interest will be reducing too (even by a tiny fraction, every little helps!). Other lenders calculate interest monthly or annually, although annual calculation should be avoided if at all possible, as you will be paying the same interest for a whole year despite your balance having been reduced by your repayments. You should also ensure that your interest is charge in arrears, rather than in advance.

Types Of Adjustable Rate Mortgage

December 19th, 2010 . Posted in Home mortgage | No Comments »
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What Is An Adjustable Rate Mortgage (ARM)?

An adjustable rate mortgage is certain type of home mortgage that has a variable interest rate. Compared to a 30 year fixed mortgage, the borrower’s loan repayment is consider much less due to the transfer of risk from the lender to the borrower.

There is a range of adjustable rate mortgage available. The 2 main components can be recognized by its name.

When you review the different types of ARMs, youll immediatey see 2 numbers. You might be given a 1:1, 3:1, 5:1, 7:1, or even a 10:1. This just a portion of the available ARMs, but to explain further, the first number is the fixed period. Even though the name of an adjustable rate mortgage suggests that it contains a fluctuating interest rate, these loans have a initial fixed period.

Here is an example. If you are looking at a 5:1 ARM, the loan will be fixed for five years thereafter the rate will adjust.

Second number actually shows how often the rate will adjust. Examples shown above end with the number 1, these loans will adjust every year after the initial fixed period. If the second number is a 2, the loan rate will adjust every two years.

Before applying for a home mortgage, make sure that you consider your needs. Although the thoughts of a fluctuating interest rate might be scary, there are some safeguards, such as interest rate caps, that protect the borrower from burdening issues that Americans once faced. More importantly choosing the right mortgage is to look at what fits your situation the best. Every home owner has different needs and priorities in life, and every home has a loan which suits a families, or individuals finances and comfort level.

This Option may not cost you an ARM Consider

December 12th, 2010 . Posted in Home mortgage | No Comments »
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This Option may not cost you an ARM Consider your Options with Adjustable Rate Mortgages

Adjustable rate mortgages, or ARM’s, are useful types of mortgages with set plans and terms which may help you in deciding which type of loan to get when buying or refinancing a home. An ARM is flexible and changes during your term of mortgage depending on certain guidelines and adjustments. An ARM will generally start at a lower than fixed rate mortgage, then begin to fluctuate throughout your loan term. If you decide to get an ARM when getting into a loan, there are several things to know that will help decide if it is right for you.

The first thing that applies to adjustable rate mortgages is that it is based around the ideal of lowering mortgage payments when fixed rate loans begin to rise. By doing so, mortgage lenders are able to offer lower prices for those who have a mortgage. One of the principles that apply is that there is a fixed period term, where the rate will have to stay the same. Depending on the type of ARM you are thinking about getting, this rate can last anywhere from the first month you decide to get the loan to up to ten years. The thing to consider with the fixed plan is how long you will be in your home and how this fixed rate will affect you with changes.

A second part of an ARM loan is the index. This is tied to the interest rate and helps to determine the adjusted rate. The indexes can come from several different sources. These include the 12 MTA, which is a one year treasury guide that is available. Another is the LIBOR, or London Interbank Offering Rate. These are updated every one to six months. There is also the Cost of Funds Index (COFI), Cost of Savings Index, (COSI), and Cost of Deposit Index (CODI). These are not recommended before the others, as the indexes seem to fluctuate more than necessary. A last way to find an index is through a bank prime rate. These, however, are based mostly around home equity lines of credit. The way that indexes work is that each set index has a margin. The margin determines your interest rate after the fixed period. These will vary widely depending on the index and lender that you have. The index will then tell the percentage of the adjustable rate in which you will have to pay. By knowing the index that the lender is using, you can find a lower adjustable percentage rate for your mortgage.

A third part to ARMs is the caps. This restricts the rate change to move no less than two percent, and no higher than six percent. This allows you to not have to pay high rates at one period of time because of the index and margin guides that are available. There are also start rates that are applicable with ARMs. These will vary by lender and index, and will most likely depend on how much you put as your down payment and what your credit rating is.

ARMs are helpful in offering you four different types of payments based on the index and caps. The first type is the minimum payment option. This is the lowest of the options. You do not pay the principle or the interest on the loan. The interest that is then not paid is simply put into an interest due, which increases the loan balance. This is also known as deferred interest or negative amortization. The next option is through the interest only payment. This will allow you to defer interest without having to make a principal reduction payment. The interest only payment will always have a restricted amount of time for you to pay the loan. The next type of ARM is a 30 year payment. With this type of payment, every payment will go towards principle and interest at a consistent pace. The fourth type of payment is the fifteen year payment. This is the same type of ARM as the 30 year option, but it is paid at an accelerated pace.

By using ARM as an option for a loan or for paying off a mortgage, one is able to see more flexibility in their payments, which can help them with finances and to pay off a loan with more ease. Before getting into an ARM loan, it is important to know what types of rates and terms apply so that you can get the best deal.

The New 50 Year Mortgage

December 5th, 2010 . Posted in Home mortgage | No Comments »
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Just a few short years ago, many people were amazed by the prospect of a 40 year mortgage. While 30 year mortgages had dominated the market for decades, the idea of being able to spread out your mortgage payments over forty years was just almost too much to comprehend. Now, there is the new 50 year mortgage and if the 40 year mortgage took the finance world by storm the 50 year mortgage is leaving many people speechless.

But, is a half century mortgage really a good idea? Well, there are certain some advantages to a 50 year mortgage. The most obvious advantage is that it allows a homeowner to spread out the cost of a home purchase and lower monthly mortgage payments. In housing markets where prices have skyrocketed this can be a major pro because it may make it available for individuals to purchase homes who might not have been able to do so otherwise.

Of course, there are also major disadvantages to consider as well. When considering a 50 year mortgage it is extremely important to consider your age at the time of the purchase. For example, lets say youre 30 at the time your purchase the home. With a 50 year mortgage, your home would not be paid off until youre 80. If you think youll still be able to meet those monthly mortgage payments long after the age by which most people have retired, this might not be a bad option. On the other hand, if youre looking to be debt free by the time you retire, its best to consider another option.

It is also important to remember that the longer you draw out the payments on your home purchase, the more youre paying in interest. This is why many critics of the 50 year mortgage are referring to them as interest-only loans. When you stop and actually look at the numbers, youll see that with this type of mortgage youre paying a lot more in interest for your home that you would with any other type of home loan, even a 40 year mortgage. Thats money you might be able to put toward something else, especially if youre looking ahead toward retirement. On a $300,000 home purchase at the going interest rate the monthly payments would be in the neighborhood of $1,800 per month with a 30 year mortgage. Conversely, with a 50 year mortgage at the same interest rate you could drive down the price of the monthly mortgage payment by about $200 per month. Since, youll be paying for the home 20 years longer with the 50 year mortgage than you would with the 30 year mortgage; however, youll actually end up paying more than $300,000 more for the home over the course of the 50 year mortgage than with the 30 year mortgage. If you went with the 30 year mortgage and the monthly payment that is $200 a month more, sure youll spend $72,000 over the course of the next 30 years but then your home will be paid for in full. With the 50 year mortgage youll still be responsible for that $1,600 a month house payment for the next 20 years.

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