Redundancy Insurance

Home > Redundancy Insurance Articles

Adjustable rate mortgage "An Info"
by Anonymous

June 30, 2004 -- We are a mortgage information dissemination company. In our day to day business we see a lot of misunderstandings related to mortgages. We hope that this article about adjustable rate mortgage along with the associated resources will help you in taking better use of this powerful financial instrument.

Mortgage interest rates are greatly affected by the ups and down in the market economy.

Economy is the major index for determining the mortgage interest rates trend. Mortgage interest rates are based on the simple principal of supply and demand. If the demand for loan increases, so do the interest rates. This is because there are more buyers, so the lender gets an opportunity to ask for higher rates. If the demand for mortgage loan reduces, so do the mortgage rates. This is because there are more sellers than buyers, so buyers in order to fetch a deal, ask for low interest rates. Now let’s talk about “adjustable rate mortgage” which is also dependent upon market economic index.

Adjustable rate mortgage is a type of mortgage in which the interest rates and monthly payments periodically move up and down as market economic index fluctuates.

It is also known as:
1. ARM.
2. Renegotiable rate mortgage.
3. The Variable rate mortgage.
4. Canadian rollover mortgage.

Features of adjustable rate mortgage are as following;
1. It is an effective tool of financing under certain conditions, such as rising income expectations, high interest rates, etc.
2. It is exactly opposite of fixed rate mortgage.
3. It offers a very low initial interest rate.
4. Here the rate of interest is tied to a variable economic index.
5. It also has a built-in cap to reduce the risks of large increases in payments.
6. It has four basic components. They are as following:
a. Adjustment interval- It is the period between potential rate adjustments. http://www.mortgagefit.com/adjustment-interval.html
b. Index- It is a guide that lender use to measure interest changes. Each ARM is linked to a specific index. http://www.mortgagefit.com/rate-index.html
c. Margin- It is an interest rate that represents the cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine your total interest rate. It usually stays the same during the life of the loan. http://www.mortgagefit.com/margin.html
d. Initial interest rate-It is a rate of interest, charged initially. The initial fixed-rate period can be as short as a month or as long as 10 years. http://www.mortgagefit.com/initial-rate.html

Borrower considers an adjustable rate mortgage if:
1. He/She want or need more home, than he/she can qualify for now at a fixed rate.
2. He/She is confident that his/her income will increase.
3. HE/She plans on moving within seven years of buying his/her home.

Borrower should also take into consideration the following risks, while taking an adjustable rate mortgage. These risks are:
1. Discounted rates –Buy downs. http://www.mortgagefit.com/buy-down.html
2. Interest rate caps. There are three types of interest rates caps. They are-
a. Periodic rate caps. http://www.mortgagefit.com/periodic-rate.html
b. Overall caps. It limits how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987.
c. Periodic payment caps. http://www.mortgagefit.com/periodic-payment.html
3. Negative Amortization. http://www.mortgagefit.com/negative-amortization.html

Besides some Arm’s also comes with an option of conversion feature that allow borrowers to convert their loans to fixed rate mortgages, for a fee. Others allow borrowers to make interest only payments for a portion of their loan terms to keep their payments low. So to keep the
financial option open, make sure that you should ask the mortgage lender if the adjustable rate mortgage is convertible to fixed rate mortgage.

If you have any other queries related to mortgage, feel free to visit this site http://www.mortgagefit.com



This article courtesy of http://www.redundancyinsurance.org.

You may freely reprint this article on your website or in your newsletter provided this courtesy notice and the author name and URL remain intact.

Submit Your Article