Adjustable Rate Mortgage

As its name implies, an adjustable rate mortgage (ARM) is one in which the rate changes (adjusts) on a specified schedule after an initial “fixed” period.

An ARM is considered riskier than a fixed rate mortgage because your payment may change significantly. In exchange for taking this risk, you are rewarded with an initial rate that is significantly below market rates for 30-Year Fixed Rate Mortgages. The more frequent the rate adjustments through the life of the loan, the lower the initial rate. Even after the loan adjusts, new rates will typically be below rates being offered to new borrowers for the 30-Year Fixed Rate program. Obviously, it’s best to have an ARM when interest rates are predicted to fall (not rise) because in periods of rising interest rates, it is possible that you will ultimately pay much more for an ARM than for a 30-Year Fixed Rate Mortgage.

Although somewhat riskier than a fixed rate mortgage, an ARM may benefit you if you have certain needs or find yourself in certain circumstances. In other circumstances, you may be better off with a fixed rate or other type of mortgage. Examine your financial and life situation with the help of your loan officer or financial advisor.

An ARM can give a short-term “boost” to your finances

Having a low initial fixed rate can free up some money early in your loan term.

For the purpose of illustration, we’ll assume a one-year ARM. This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 12 months on the anniversary of your loan.

We’ll assume a 30-year fixed rate with zero points and a rate of 7.625 percent compared to a one-year ARM with zero points and an initial rate of 5.625 percent.

On a $240,000 loan amount, the 30-year fixed rate would yield a monthly payment of $1,698.70. The one-year ARM would yield a monthly payment of $1,381.58. That's a difference of $317 per month, or $3,800 over the next year.

What could you do with an extra $3,800 this year? Some borrowers find the extra money useful for paying off other credit or moving expenses, for landscaping the yard, and so on. Of course, you will want to stay away from incurring additional debt or improving your lifestyle to the point that you can’t afford the higher payment once your rate adjusts upward.

An ARM can allow you to qualify for "more house"

Obtaining an ARM can allow you to qualify for a higher loan amount and therefore a more valuable house.

Many people with exceptionally large mortgages get one-year ARMs and refinance them every year. The low rate allows them to buy a costlier home yet pay the lowest mortgage payment possible. The down side is that there are costs associated with refinancing. So before you use this option, look at all the costs and do the math yourself or ask for help from your loan officer.

An ARM could be beneficial depending on your future plans

What are the factors that could cause you to move or upgrade in the next few years? Why obtain a higher-rate 30-year fixed rate mortgage if a job transfer or twins is even close to likely? An ARM with a lower initial rate could be a better (and cheaper) way to go.

If you know that you are only planning on living in a property for a short period of time (1-10 years) then the benefits of getting an adjustable rate mortgage are enhanced. You can enjoy the interest and payment benefits with less of the risk. Ask your lender to help you crunch the numbers.

If you do plan to refinance or sell soon (and therefore pay off the loan), read the loan documents carefully. Some contracts stipulate a penalty for paying off the loan early.

What affects the amount of the adjustment?

The amount of the rate change (referred to as an Adjustment) is determined by a mathematical formula based on a particular index, the most common being the 1-Year U.S. Treasury Bill.

Your lender does not control the index so it is safe to assume that your adjustment will be fairly determined (although you should always verify your new rate by comparing with published numbers).

All adjustable rate mortgages have a lifetime rate cap (ceiling), which limits the amount the interest rate of the loan can increase over the life of your loan. Most adjustable rate mortgages also have a periodic rate cap, which limits the amount of rate increase for each adjustment.
from:www.mortgagequotes.com/Mortgage_and_Finance/

Mortgage Rates Hit Four and Five Year Highs

Mortgage interest rates hit another recent high water mark during the week ended April 13 and 14 according to both Freddie Mac and the Mortgage Bankers Association respectively.

Freddie Mac's Weekly Primary Mortgage Market Survey reported that the average 30-year fixed rate among the lenders it surveys was 6.49 percent. This was the highest level achieved by the benchmark product since July 2002 when the monthly average was also at 6.49 percent. This was an increase of 6 basis points over the previous week. Fees and points were unchanged at 0.6.

The 1-year adjustable rate mortgage also hit its highest level in many months, averaging 5.61 percent. These mortgages have not been at this level since August 2001 when the average for the month was 5.71 percent. Last week the 1-year was at 5.57 percent. Fees and points did move downward from 0.7 to 0.6 over the week.

The 15 year fixed rate loan was up four basis points to 6.14 percent with fees and points remaining at 0.5.

The 5/1-year adjustable rate mortgage moved from 6.11 to 6.13 percent and fees and points increased from 0.6 to 0.7.

The Mortgage Bankers Association's Weekly Mortgage Applications Survey reported the contract interest rate for 30-year fixed-rate mortgages averaged 6.56 percent, up from 6.50 percent the previous week. Points, including the origination fee, dropped to 1.10 from 1.20. The 15-year fixed-rate mortgage moved upward two basis points to 6.19 percent and points increased to 1.22 from 1.16. The 1-year ARM increased from 5.97 percent to an even 6.0 with points up from 0.84 to 0.86. All MBA figures are for 80 percent loan to value mortgages.

Mortgage application activity was down 1.7 percent on a seasonally adjusted basis from the week of April 7 and 1.4 percent on an unadjusted basis. Activity was 14.9 percent less than the same period one year ago.

Refinancing as a share of all mortgage applications increased slightly, from 36 percent to 36.4 percent and adjustable rate mortgage applications also increased to 28.9 percent of all applications from 28.6 percent the previous week.
from http://www.mortgagenewsdaily.com/4192006_Mortgage_Rates.asp