Mortgage Basics


Mortgage Basics 1

Mortgage Basics
Adjustable Mortgage Basics (ARMs)
So what are the​ basics of​ Adjustable Mortgages? the​ simplest definition is​ that your interest rate will change,​ or​ adjust,​ during the​ term of​ the​ loan .​
the​ adjustments will either lower or​ higher the​ monthly payment typically every 6 or​ 12 months .​
Borrowers considering this option should note that certain ARMs adjust as​ frequently as​ once a​ month .​
Always read the​ fine print before signing by the​ X .​
Fortunately,​ ARMs are not subjected to​ the​ arbitrary whims of​ the​ lender; they (the rates) are attached to​ a​ specific index over which the​ lender has no direct influence .​
the​ life term of​ an​ ARM has two distinctions: First,​ the​ interest rate is​ fixed for a​ determined amount of​ time –anywhere from one month to​ 10 years .​
Second,​ after the​ initial period of​ fixed interest,​ the​ rate will adjust in​ accordance to​ the​ specified index to​ which the​ interest rate is​ tied .​
to​ increase the​ attractiveness of​ this option,​ provisions within the​ loan are established to​ prevent the​ interest rate from adjusting more (or less) than 1 to​ 5% from the​ previous rate .​
This is​ a​ contractual cap that will vary between lenders and their agreements .​
the​ term of​ the​ loan will also have a​ cap that dictates how much the​ interest rate of​ the​ loan can rise or​ fall beyond the​ rate of​ the​ loan at​ inception .​

Two terms which are fairly easy to​ understand are important to​ you​ because they affect your monthly bottom line .​
the​ first is​ the​ index .​
the​ index is​ a​ general rate that the​ lender uses to​ measure the​ overall interest rates trend .​
the​ second is​ the​ margin .​
the​ margin is​ the​ spread between the​ index and the​ rate that you​ will be charged .​
This is​ where the​ lender makes his or​ her money – how they pay their mortgage .​
the​ margin will vary between lenders and the​ index that they use .​
Knowing what the​ index means as​ well as​ the​ margin,​ you​ can use this formula every time the​ interest rate is​ adjusted: Index + Margin = Interest rate .​

The decision to​ acquire an​ adjustable rate mortgage depends upon certain factors such as​ the​ borrower’s time expectancy in​ the​ house,​ whether the​ borrower is​ risk tolerant or​ risk adverse,​ and the​ ability of​ the​ borrower to​ obtain a​ loan.



Mortgage Basics



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