Adjustable Rate Mortgages This Home Mortgage Loan May Not Be For The Weak At Heart

What About Adjustable Rate Mortgages And Home Mortgage Loan

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 dont 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 ​ dont 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 1980s 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​ backbreaking 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​ lenders 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 51 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,​ Whats important is​ finding out what works for you.

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