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

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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