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People are asking . . .
“Some newspaper ads for home loans show surprisingly low rates. Are these loans for real, or is there a catch?”
Some of the ads you see are for adjustable rate mortgages (ARMs). These loans may have low rates for a short time
maybe only for the first year. After that, the rates may be adjusted on a regular basis.
This means that the interest rate and the amount of the monthly payment may go up or down.
“Will I know in advance how much my payment may go up?”
With an adjustable-rate mortgage, your future monthly payment is uncertain. Some types of ARMs put a ceiling on your payment increase or interest-rate increase from one period to the next. Virtually all types must put a ceiling on rate increases over the life of the loan.
“Is an ARM the right type of loan for me?”
That depends on your financial situation and the terms of the ARM. ARMs carry risks in periods of rising interest rates, but they can be cheaper over a longer term if interest rates decline. You will be able to answer the question better once you understand more about ARMs. This booklet should help.
Mortgages have changed, and so have the questions that consumers need to ask and have answered.
Shopping for a mortgage used to be a relatively simple process. Most home mortgage loans had interest rates that did not change over the life of the loan. Choosing among these fixed-rate mortgage loans meant comparing interest rates, monthly payments, fees, prepayment penalties, and due-on-sale clauses.
Today, many loans have interest rates (and monthly payments) that can change from time to time. To compare one ARM with another or with a fixed-rate mortgage, you need to know about indexes, margins, discounts, caps, negative amortization, and convertibility. You need to consider the maximum amount your monthly payment could increase. Most important, you need to compare what might happen to your mortgage costs with your future ability to pay.
Glossary of Terms
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Risks and Advantages of Adjustable Rate Mortgages
ARMS Information for Borrowers
This web page explains how ARMs work and some of the risks and advantages to borrowers that ARMs introduce. It discusses features that can help reduce the risks and gives some pointers about advertising and other ways you can get information from lenders. Important ARM terms are defined in a glossary. The checklist should help you ask lenders the right questions and figure out whether an ARM is right for you. Asking lenders to fill out the checklist is a good way to get the information you need to compare mortgages.
What is an ARM?
With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
Lenders generally charge lower initial interest rates for ARMs than for fixed rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make the decision about whether to extend a loan on the basis of your current income and the first year’s payments. Moreover, your ARM could be less expensive over a long period than a fixedrate mortgage *for example, if interest rates remain steady or move lower.
Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It’s a trade-off, you get a lower rate with an ARM in exchange for assuming more risk.
Here are some questions you need to consider:
-- Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
-- Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
-- How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
-- Can my payments increase even if interest rates generally do not increase?
CONTINUE To : How ARMs Work & Reducing Your Risk with Adjustable Mortgages
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This information has been prepared to help you make the important decisions involved in buying and financing your home. However it should not be viewed as all inclusive OR as a replacement for professional advice. Talk with attorneys, mortgage lenders, real estate agents, and other advisers for information about lending practices, mortgage instruments, and your own interests before you commit to a specific loan or action.
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