|
ARM: Adjustable Rate Mortgage
With an ARM, the interest rate is adjusted over the life of the mortgage, resulting in changes in monthly repayments, the loan term and/or the principal. Payments usually change periodically with changes in interest rates based on a specified index, such as US treasury securities or state and national inflation indices. Because it involves greater risk, an ARM is initially available at a lower interest rate than a fixed-rate mortgage. You should choose an ARM with a ceiling or cap on the rate of interest that can be charged (irrespective of how high the index goes). Caps can be annual or lifetime, i.e. over the full period of the mortgage. Generally an ARM’s rate cannot rise more than 2 percentage points per year or 6 per cent over the loan’s life. Note, however, that if interest rates rise considerably, a cap may cause negative amortization, where the balance on the loan increases instead of reduces, despite the fact that you’re making maximum monthly payments.
An ARM is a good choice for someone who expects his income to rise sufficiently to offset the likely higher repayments. When comparing the cost of an ARM with a fixed-rate mortgage, bear in mind that an increase of just 1 per cent in the interest rate, e.g. from 7 to 8 per cent, costs $75 a month on a $100,000 mortgage or around $27,000 over 30 years. Most ARMs can be converted to fixed-rate mortgages. There are also other types of mortgage available, including:
Two-step Mortgage: A two-step mortgage is a 30-year mortgage whose rate adjusts once only, after five or seven years, the initial rate being around half a point lower than a fixed-rate loan.
Bi-weekly Mortgage: The normal repayment frequency for mortgages is monthly. However, one of the most popular forms of mortgage in recent years has been the biweekly mortgage, where payments are made every two weeks (most Americans are paid biweekly). The big advantage of a biweekly mortgage is that a loan that usually takes 30 years to amortize is paid off in 19 to 21 years when paid on a biweekly basis. The reason is that biweekly payments (26 a year) are equivalent to 13 monthly payments, meaning the loan is paid off much faster resulting in significant interest savings. The biweekly mortgage (for all its financial benefits) costs around one monthly payment (i.e. 8 per cent) more per year than a monthly fixed-rate mortgage, but the extra amount is evenly distributed throughout the year.
Interest rates for biweekly mortgages are usually similar to those for standard 30-year, fixed-rate mortgages. However, because repayments of a biweekly mortgage are slightly higher than for a 30-year, fixed-rate mortgage, income requirements are usually higher. Mortgage payments for a biweekly mortgage are made directly from your bank account, so if you’re paid biweekly your payments will correspond to the deposit of your pay cheque.
Other Mortgages: There are many other types of mortgages including a balloon, re-negotiable rate (roll-over), graduated-payment, purchase money, shared appreciation, shared-equity, seller take-back, wraparound, growing-equity, land contract, buy-down, reverse-annuity, convertible and rent with option (where a renter has the option to buy at a specified time and price). These ‘creative financing’ mortgages are usually offered in times of high interest rates and tight money and they may not be offered when mortgages are readily available.
A wealth of information is published about buying homes and obtaining mortgages in America, including The Mortgage Money Guide, available free from the Federal Trade Commission, 600 Pennsylvania Aye, NW, Washington, DC 20580-0002 and The Field Guide to Home Buying in America by Stephan M. Pollan and Mark Levine.
If you have a bad credit rating, avoid so-called ‘credit-repair’ companies like the plague. These companies charge from $50 to over $1,000 to ‘fix’ your credit report. In most cases they do nothing at all or nothing you cannot do yourself for free or for a few dollars. Never give anyone advertising easy credit approval or low credit card interest rates your current account number, which may be used to fraudulently withdraw money from your account. Finally, if you’re refused credit, look on the bright side: without credit you cannot run up any debts!
For further information obtain a copy of the Consumer Handbook of Credit Protection Laws available free from the Federal Reserve System, 20th Street, 18 Constitution Avenue, NW, Washington, DC 20551 (202-452-3245, www. federalreserve.gov/publications.htm). Find More information about adjustable rate mortgage >>
|
 |
Recommended Quick links
Mortgage calculator
Online mortgage calculator with charts, graphics and detailed information.
www.sitzone.com/mortgage-calculator/calculator.php
Mortgage amortization
Mortgage amortization schedule calculator with monthly or yearly details.
www.sitzone.com/amortization-calc/calculator.php
Loan calculator
Loan calculator based on your home value and your credit.
www.sitzone.com/mort-calculator/mortcalculator.php
Mortgage calculator for your real life in USA
Takes under account all your expenses in USA. Try this FREE tool.
www.sitzone.com/reallifecalculator.php
| |
|
More