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Adjustable Rate Mortgages

Adjustable rate mortgages can be useful when fixed rates begin to rise. Adjustable rate mortgages have a rate that is fixed for a specific period of time and then begin to adjust periodically. When evaluating any adjustable rate mortgages there are several things in addition the rate that you will need to evaluate.

I have included a section on the new Cash Flow Adjustable Rate Mortgages. A LIBOR or MTA based product which gives you flexibility in managing your mortgage.

1) Fixed Period    Adjustable rate mortgages will always have a period of time where the rate is fixed. These fixed periods can range from 1 month to 10 years, although many lenders have dropped their 10 year offering as their pricing was actually higher than fixed rates. As fixed rates rise, it will be interesting to see if they make a comeback. There are several measures you should consider when looking at the fixed period such as the length of time you plan to remain in the home and your tolerance for potential changes in rate in the future. One good way to think about this is to consider who is assuming that risk. In a 30 year fixed loan, the lender has assumed all of the risk, and you have none so that loan will have the highest rate. At the other end of the scale are the 1 year adjustable rate mortgages where you have assumed most of the risk and the lender prices the product accordingly.

2) Index                The index the loan is written against is one of the most important factors to consider when looking at adjustable rate mortgages and I am constantly amazed when I talk with a potential client that another lender simply gave them an interest rate without even discussing which index the loan is tied to because the index will have a huge impact on your rate after the fixed period. In years past, adjustable rate mortgages were tied only to the 1 year constant maturity treasury index (the average cost of short term borrowing by the Federal Government). However, today loans are available which are 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. Here is the above data in chart form.

3) Margin            The Margin is the number which is added to the index to determine your interest rate after the initial fixed period. The margin can vary widely from index to index and from lender to lender. Consider this, if the rate is the same on 2 five year adjustable rate mortgages 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 mortgages carry rate change caps, frequently described as 2/6. This would restrict the rate change (up or down) to 2% at any rate 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. Caps can vary from lender to lender and index to index.

Many of my clients are converting from fully amortizing payments to an interest only approach with a significantly lower monthly payment. I have some extensive information available. Read more to see if this powerful tool could work for you.

Read more about Adjustable Rate Mortgages Closing Costs

In 2008, Short Sales are where most of the bargains in real estate are and they are NOT just for investors. Learn more about Short Sales

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

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

New! View my Wealthbuilder presentation and learn the safe way to manage your debt and fund your retirement.

I hope the information on this page was useful to you. Please scroll down to view my Mortgage Market Guide. It is a weekly publication explaining the financial markets from a consumer's perspective that is available on this website or by email subscription. I have nearly 8,000 subscribers today and would be happy to have you as well. Your email address will never be used for any other purpose.

    Prequalify for your Adjustable Rate Mortgages.