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If you are considering an ARM loan, ask your lender about the following items:
Start Rate/Introductory rate
- The initial interest rate charged on the loan
- Only good for designated period
- Often reduced as borrower incentive
Margin
- A fixed interest rate that is determined by the lender
- Added to the index value to determine new mortgage rate
- The margin can vary widely from lender to lender (2 - 3.5%)
Adjustment period
- Period of time between interest rate changes
- When lender determines rate change by adding index & margin
- Can be as frequent as a month
- Can be as frequent as several years
Rate Cap/Payment Cap
- Periodic Rate Cap (limit on how much rate can increase each adjustment)
- Lifetime Rate Cap (limit on how much rate can increase for the life of the loan)
- Periodic Payment Cap (limit on how much loan payment can increase
- each adjustment)
Index
- Gauge that measures interest rate levels in the economy
- Added to lender's margin to determine new mortgage rate
- The most common index is the average weekly yield on the one year T-bill
- Other common indexes are the 6 month CD, Cost of Funds and LIBOR
- Current & historical index values
Negative Amortization
- Can occur on ARMs with payment caps
- Occurs when capped mortgage payment cannot cover loan's interest costs
- Unpaid interest gets added to outstanding loan balance
http://mortgages.interest.com/content/armloancenter/armloanexplain.asp |
