Adjustable Rate Mortgage
Adjustable rate mortgage products can be useful when fixed rate loan rates begin to rise. Many lenders have introduced adjustable rate mortgage programs which can help manage your mortgage payments. Adjustable rate mortgage products have a rate fixed for a specific period of time and then begin to adjust periodically. When evaluating any adjustable rate mortgage there are several things that you need to evaluate.
1) Fixed Period An adjustable rate mortgage will have a period where the rate is fixed. These periods can range from 1 month to 10 years. There are several measures to consider when looking at the fixed period like the length of time you plan to remain in the home and your tolerance for potential changes in rate in the future.
The index of the adjustable rate mortgage is one of the most important factors to
consider. In years past, an adjustable rate mortgage was usually tied
to the 1 year constant maturity treasury index. Today, adjustable rate mortgage loans are available tied to many other indexes such as:
Here is a 10 year average comparison between a 30 year fixed and fully indexed LIBOR, MTA, COFI, and the 1 year Treasury Index in chart form.
3) Margin The Margin is added to the index to determine your rate after the initial fixed period. The margin can vary from index to index and from lender to lender. Consider this, if the rate is the same on 2 five year adjustable rate loan products but one is indexed against the 10 year treasury which at the time of this writing is at 4.40 and carries a 2.5 margin and the other is indexed against the 1 month LIBOR which is at 1.8 and carries a margin of 2.6, which is the better loan? Clearly it is the LIBOR based product.
4) Caps All adjustable rate products carry rate change caps, frequently described as 2/6. This would restrict the rate change (up or down) to 2% at any change point and no more than 6% over the life of the loan. For example, if you had a start rate of 4.5%, in the worst case, your rate at the change could not be more than 6.5% and the loan could never go above 10.5% at any time.
* I have included a section on the new Cash Flow Adjustable rate mortgage.
Here is a useful Adjustable Rate Mortgage payment calculator
Read more about Adjustable Rate Mortgage Closing Costs
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Prequalify for your
Adjustable Rate Mortgage.
Prequalify for your Adjustable Rate Mortgage.