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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.

2) Index                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:
        12 MTA- A variant of the 1 year treasury is an average of the most recent 12 months. Very stable
        10 year Treasury Index Stable but not too popular with lenders.
        LIBOR-London Interbank Offering Rate. A 1 month and 6 month index are available. Extremely stable
        COFI-Cost of Funds Index for the 11th Federal District. Stable
        COSI-Cost of Savings Index. Unacceptable stability.
        CODI-Cost of Deposits Index. Unacceptable stability
        Bank Prime Rate. Very unstable, used primarily for home equity lines of credit

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

I have an article "Buying your home in 2008" by email explaining negotiating strategy in today's market.

Learn more about Loan Modification. If you can not refinance, it may be the best way to save your home today.

If you have had credit issues in the past, it is absolutely critical in today's market that they be addressed before you try to get a loan. I have referred my clients to CreditFX for the past 5 years. Exceptional customer service and I am often stunned at what they have been able to have removed from people's reports, allowing my clients to qualify. Their charge of $199 is one of life's true bargains.

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As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your debt is structured today can have a life changing effect in the years to come.  Read more about this free, no obligation service.

    Adjustable Rate MortgagePrequalify for your Adjustable Rate Mortgage.

 

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