Lately Adjustable Rate Mortgages (ARMs) have gotten a lot of bad press. ARMs have been mentioned with much distain in the media lately. If you believe the media hype all ARMs are horrible and no borrower should ever consider getting this type of loan. This is an unfair assessment. There are many positives things about ARMs and many reasons to consider them. They can help first time home-buyers or current owners needing to slim down expenses during these tight times.
First, we need to preface our discussion with this statement, "Not all ARMs are created equal". But the word ARM should not strike fear into your heart. You should understand the risks before you sign on the dotted line. Have your mortgage provider line out the worse-case scenario before you agree to this type of loan. Review the parameters of an offered ARM program carefully. Make sure you ask the following questions.
-What are the Margin and the Index? You want to get the lowest margin avai lable. Currently the best ARMs offer a margin of 2.25%. By combining the margin and index rate (as published by the Wall Street journal) you arrive at the new interest rate. You also need to take the loan caps into account. See definition of caps below. The new rate is the calculated interest rate or the cap whichever is less.
-How often does it adjust? Does your loan first adjust in 1 month, 1, 3, 5, or 7 years? Hybrid ARMs or fixed period ARMs have a fixed portion at the beginning of the loan.
-What is the adjust interval? After the first adjustment when does your loan adjust again? Every month, every 6 months or every 12 months? You want this period as long as possible.
-What are the Caps? A cap means what is the max it can adjust each time. Conventional loans typically come with a 5/2/5 cap. This means initially your loan can adjust 5% at the time of the first adjustment; then 2% each adjustment interval with a life-time cap of 5%. However, Government loans have an adjustment cap of 1/1/5. Again this means initially your loan can adjust 1%, then 1% each interval with a life-time cap again of 5%.
Once you have looked at the terms of the loan and understand the worse-case scenario you can see if an adjustable rate mortgage is right for you.
ARMs can be a really good option for first-time homebuyers who are tight on their debt-to-income ratio. Many first time homebuyers have student loans. Even though these student loans are deferred and will be consolidated when they ready to go into repayment, many lenders require a minimum payment on each loan be used to qualify. Often borrowers have more than one deferred loan show ing on their credit and these minimum payments can add up quickly. This can easily push the debt-ratio to high to qualify. ARMs can be close to 1% lower than their fixed rate counterparts. A lower interest rate can bring this ratio back down, helping a first time homebuyer qualify.
Another reason to choose an ARM over Fixed Rate is by considering how long you will be living in your home. It is a statistic in America that people move or refinance every 5 years. If you can get a full 1% less on your mortgage for those 5 years why pay for a fixed? If you plan to move in the next 5 years this can be a great way to slim down your monthly budget. If you choose an ARM over a Fixed, you can save yourself $6,000 for every $100,000 borrowed.
Hybrid ARMs obtained through FHA or VA are the very best ARM programs available in the market today. The margin is 2.25%. It is tied to one of the most conservative index available, the 12 Month Treasury Average. Which is just as it so unds a rolling average meaning it doesn't adjust wildly like other in dexes. It can never adjust more than 1%. I mentioned before the initial rate is usually 1% below a fixed rate so in worse case it will take and extra year to go up above the fixed rate you could have gotten at closing. Example if you were to close a FHA Fixed rate loan today you would probably get a 5% interest rate.
If you were to close instead on a 5/1 FHA ARM loan today you would probably get a 4% interest rate. The adjustable rate loan would stay at 4% for 60 months. Month 61 this loan could adjust no higher than 5%. You would then not have another adjust for another 12 months. So your ARM would stay at or below 5% for a full 72 months. Remember the average American moves or refinances every 5 years or 60 months.
An adjustable rate mortgage is not the right choice for every borrower but there are many who could benefit if they understand the risk and rewards inherent in these loans. Understanding all your options can help you make the very best decision for yo u and your family.
To get more information on how you can get a free appraisal with you next home mortgage or help finding the loan program that is right for you. Visit my website http://www.theutahhomemortgage.com
Collette McKee
Mortgage Specialist with Academy Mortgage
I don't consider myself a "Loan Originator" even though I am licensed as one. I consider myself a Mortgage Specialist. During the past eight years, I have worked not only as an originator but as a process/underwriter and worked in the back office of several different mortgage companies. Being able to help people get mortgages, help them to also understand their mortgage and the process behind it is very rewarding.
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