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Adjustable Rate Loans |
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An adjustable rate mortgage
(ARM) is a home loan program with an interest rate that
adjusts periodically to reflect changes in a specified
financial index. Such an index could be the one-year
Treasury, the Cost of Funds Index (COFI), the LIBOR (London
Interbank Offered Rate) or other popular indexes. ARMs
may adjust every six months or once a year and most ARM
programs include caps that protect your monthly payment from
increasing too much, as well as a lifetime cap, a rate that
your ARM will never exceed over the life of the loan. |
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| Advantages |
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Adjustable rate
mortgages (ARMs) generally have the lowest
initial interest rates meaning a lower monthly
payment. This initial rate is fixed for a
defined period of time and usually corresponds
to the name of the product. For example, a
"5 Year ARM" would mean the initial rate is
fixed for the first five years.
The most popular
advantage behind ARM loans is the borrower tends
to qualify for a larger loan amount than they
would applying for a traditional 30 year fixed
rate. ARMs are generally recommended for
homeowners who plan to keep the loan for a short
time and are confident their income will remain
the same or grow during the life of the loan. |
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Dis-Advantages |
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The traditional
ARM mortgage (one that does not include minimum payments or negative
amortization) carries very little unknown
risk at the time of origination.
The biggest risk
for any homeowner is simply assessing the amount
of savings over a fixed rate and understanding
your comfort level with possibly being exposed
to much higher interest rates should you be
forced to keep the property longer than
expected. Remember, it's not just a matter
of where rates are in 5 or 10 years - it's also
a question of whether you not will still be
eligible for the same type of mortgage. |
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Questions
to Ask |
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We try to group
all questions for home loan programs into two
(2) categories. |
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Ask Yourself... |
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Will your
income stay the same or increase during the
live of the loan?
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Do you
foresee any problems with qualifying for the
same type of loan program at the
end of the initial fixed rate period?
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Is your
time frame of ownership realistic?
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Ask Your Lender... |
- How long is
the initial fixed rate period?
- What index
is your interest rate tied to?
- When is the
first interest rate adjustment date?
- What are
the adjustment caps?
- How often
can the interest rate adjust?
- Can you pay
down principal without penalty?
- How are
extra principal payments applied?
- Will
extra payments reduce my monthly payment?
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