Adjustable Rate Mortgages: This Home Mortgage Loan May Not Be For The Weak At Heart

“I am interested in a fixed mortgage rate.” I said.

“May I ask why that is?” The broker asked politely.

“Looking at your last ten years of history, you have done pretty well with the adjustable rate. May I suggest that we look at some adjustable rates, which are even less than the rate you’re paying and with caps you don’t have to worry about the interest rate hikes.

When he was done I explained to him that I recall the 18 % -19 % interest on mortgage loans in the early 1980’s that he seemed too young to remember. I pointed out that on a $100,000 loan, the 18 % interest is $1,500 per month on the mortgage interest alone. , if you have a $200,000 loan the interest alone would be a back-breaking payment of $3,000 per month.

Margin – This is the lender’s markup and where they make their profits. The margin is added to the index rate to determine your total interest rate.

There are also those older individuals who have suffered from some set back in life and do not enjoy a high credit score or do not have a very high income. Since a poor credit score increases the interest rate a bank offers to potential borrowers, a fixed rate may be too high for these individuals to consider.

“I don’t want to deal with the risk of rising interest rates. At my age, I can not afford the risk.”.

Let’s take a look at some terms that help you understand ARM better.

Periodic caps – The lenders may limit how much they can increase your loan within an adjustment period. Not all ARMs have periodic rate caps.

I heard the news about another interest rate hike and thought it was about time to look into refinancing my mortgage. I contacted my mortgage company.

I knew he thought I am out of my mind thinking about an 18 % mortgage interest rate in today’s environment. The gap in understanding wasn’t about fixed rate mortgages vs adjustable rate mortgages (ARM).

When lenders are considering your mortgage loan application, they look at what percentage of your income is available for repaying their loan. With an income of $5,000 per month, a $2,000 loan payment is 40 % of your income and a $1,000 payment is 20 % of your income.

ARM Indexes – These are benchmarks that lenders use to determine how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. When you are shopping around, consider both the margin and the index.

Negative Amortization – In most cases a portion of your payment goes toward paying down the principal and reducing your total debt. When the payment is not enough to even cover the interest due, the unpaid amount is added back to the loan and your total mortgage loan obligation is increased. In short, if this continues you may owe more than you started with.

To understand this gap, let’s look at the adjustable rate mortgages. This type of mortgage loan is usually lower than the fixed rate and the lower rate means lower payment that in turn means easier qualification.

As you compare loans, lenders and rates remember Henry Moore who said, “What’s important is finding out what works for you.”.

Overall caps- Mortgage lenders may also limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987. Payment Caps – The maximum amount your monthly payment can increase at each adjustment.

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At this point the broker took a breather so that I can say, “No thank you. He asked before launching into a lecture that had a mix of economy 101, budgeting 1, a dash of fortune telling and a totally unrealistic and healthy optimism of future trend in interest rates.

Interest Rate Caps – This is the maximum interest a lender can charge you.

Adjustment Period – Refers to the holding period in which your interest rate will not change. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.






Adjustable mortgage rates appeal to young people with an innate optimism, hopes of increased income and the high possibility of moving to a different home in a short period of time. They need to look at what they can afford to pay and can not worry too much about the distant future. To them anything is better than renting which is absolute waste of money.

Negative amortization is the possible downside of the payment cap that keeps monthly payments from covering the cost of interest.

May I suggest that we look at some adjustable rates, which are even less than the rate you’re paying and with caps you don’t have to worry about the interest rate hikes. I knew he thought I am out of my mind thinking about an 18 % mortgage interest rate in today’s environment. The gap in understanding wasn’t about fixed rate mortgages vs adjustable rate mortgages (ARM). Adjustable mortgage rates appeal to young people with an innate optimism, hopes of increased income and the high possibility of moving to a different home in a short period of time. Overall caps- Mortgage lenders may also limit how much the interest rate can increase over the life of the loan.
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