Adjustable Rate Mortgages Part 2
ARMs, how they work.
A basic Adjustable Rate Mortgage (ARM) is based upon the following items (be sure your lending officer and real estate agent explains them in detail)
- An Index
- Margin
- Adjustment Period
- Maximum Increase per Period
- Maximum Increase over the Life of the Loan
INDEX: Each ARM is tied to an economic index. The index relates to the cost of the money loaned, to the lender. The loan interest, upon which the payment is based is equal to the INDEX + MARGIN. Be Careful when evaluating the index. A volatile index means your loan will adjust in an extreme fashion. Common indexes are:
- LIBOR, the London InterBank Offered Rate
- COFI, the Federal Cost of Funds Index
- T-Bills, the interest rate paid by the Treasury Bills.
- Many others may be used.
MARGIN. A percentage added to the index to allow the lender to recover costs and make a profit. If you are the borrower, you want this number to be as low as possible. If you are the lender, you want it to be as high as possible.
ADJUSTMENT PERIOD. This could be monthly, quarterly, twice a year, or yearly. Pick the one you decide will fit your situation. Pick carefully, however, you will not be able to change this later.
MAXIMUM INCREASE PER PERIOD. This one can be a killer. As a borrower, you want this to be as low as possible. An increase of 1% on a $200,000 loan is about an $80 a month increase. If you do this quarterly, you might find you cannot afford the payment.
MAXIMUM INCREASE PER YEAR. Again, another killer. Keep this number as low as possible.
MAXIMUM INCREASE FOR THE LIFE OF THE LOAN. This caps the loan. No matter what happens to interest rates over the life of the loan, this is the maximum interest rate you can be charged.
Jim Little, Your Sun City Realtor
http://jclittle.com/
Ken Meade Realty
17001 N Del Webb Blvd
Sun City AZ 85373
800-877-1776
623-977-1776
By the way…if you know someone who is interested in buying or selling real estate in the Sun City Neighborhood, Peoria, Glendale or Surprise, please call me with their name and phone number. Thank you!
Peoria AZ, Sun City, Sun City West AZ, Surprise AZ, buying a home, homes for sale | Jim Little | September 15, 2007
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