Adjustable Rate
Mortgage
The Differences
Between an Adjustable Rate Mortgage and Fixed Rate
Mortgages
With adjustable-rate
mortgages, the interest rate can fluctuate at specific
intervals -- often one year, five years or seven years. If
interest rates continue to rise, as the Federal Reserve
has hinted, so will borrowers' monthly payments. When home
prices are rising, buyers can often refinance to lower
their costs. But appreciation is flattening and some
economists believe prices could even decline, which could
leave borrowers stuck paying a rate they can't afford.
There are a number of reasons that the popularity of these
instruments is falling. Most notably, the spread between
adjustable and fixed-rate mortgages is narrowing: A
30-year fixed rate stands at 6.34 percent, while the rate
is 5.93 percent for a 5-year ARM, according to Freddie
Mac. In the past few years, the difference was typically a
full point or higher.
Refinancing your
mortgage allow all to reduce their interest costs
while paying off debts. Refinancing, typically is known to
reduce one's payment obligation while also reducing your
current risk in interest fluctuations.
Beware: Certain types of loans contain early
payment penalty clauses. Some refinanced loans, while
having lower initial payments, may result in larger total
interest costs over the life of the loan, or expose the
borrower to greater risks than the existing loan.
Calculating the up-front, ongoing, and potentially
variable costs of refinancing is an important part of the
decision on whether or not to refinance.
Simple:
Refinancing allows you to pay off your current mortgage by
obtaining a new one. Most people refinance in order to
lower their monthly payment obligations or to get a
different loan type or length.
In some cases, customers may wish to get cash out
of their home. They do this by borrowing against the
equity in their home and receive cash in exchange. People
can use this cash to pay off credit cards, to pay for
college tuition, to pay medical expenses, or even purchase
another home.
Would Refinancing Help
You?
If you own your own home, and if your home is worth more
than you owe on it -> then you have equity. If your
current monthly payment obligations are hard to make
monthly, then refinancing will help. Other reasons vary
from college tuition needs, weddings and medical reasons.
What is an Option ARM
Mortgage
Every month, you receive
a statement of your loan that allows you to choose the
payment amount that best fits your current financial
situation: pay the minimum amount or interest only to free
up your funds to pay other bills or investment
opportunities. You are also allowed to make larger
payments for a quicker equity build-up. If your income
fluctuates seasonally, option ARM mortgages are a great
alternative. There are four payment Options per month
Option 1 - Minimum Payment Due - This option gives
you more cash now and keeps your monthly payments
manageable. The minimum payment allows for the lowest
mortgage payment of any kind of loan.
You can pay the minimum amount, in which case some of your
interest might be deferred. Deferred interest,occurs when
the monthly payment is not sufficient to cover the
Interest accrued during the month prior. The unpaid
Interest is added to the balance of the loan, rather than
increasing the current monthly payment.
Minimum Payment changes annually and is calculated using
the initial start rate for the first 12 months.
The minimum monthly
payment is usually recalculated annually thereafter; and
is based on the outstanding balance, remaining loan term
and prevailing interest rate. This change is subject to a
7.5% payment cap for the first 5 years.
7.5% Payment Change Cap
limits how much this option payment can increase or
decrease each year
During the initial interest rate period (1 month), Option
1 represents a full principal and interest payment;
therefore Options 2 and 3 are not applicable
Option 2 - Interest
Only Payment - At those times when the minimum monthly
payment is not sufficient to pay the monthly interest due,
you can avoid deferred interest by paying the minimum
monthly payment plus any additional interest accrued
during the month.
Payments remain manageable, with no change in your
principal balance for that month
Option 2 will not be offered if the interest only payment
is less than the minimum payment due, since the minimum
payment is the least amount the lender will allow to be
paid.
Option 3 - 30 Year
Full Principal and Interest Payment - This is the
fully amortized payment based on a 30 year loan. (Some
programs offer a 40 year term)
Calculated each month based on the prior month's interest
rate, loan balance and remaining loan term pays all the
interest due and reduces your principal, to pay off your
loan on schedule
Option 3 will not be offered if the full principal and
interest payment is less than the minimum payment due,
since the minimum payment is the least amount the lender
will allow to be paid.
Option 4 - 15-Year
Full Principal and Interest Payment (if applicable -
depends on lender)- For faster equity build-up, quicker
payoff and substantial interest savings, choose the
largest monthly payment option.
Calculated to amortize your loan based on a 15-year term
from the first payment due date
Option 4 will be offered only on the 30- or 40-year term
and will cease to be an option when the loan has been paid
down to its 16th year.
