Find Out The Truth About ARMs
You have a lot of choices to make in purchasing a house and deciding upon a home loan, and in today's confusing loan world, you now also have to choose the index that you want for your Adjustable Rate Mortgage (ARM).
The index of an ARM (Adjustable Rate Mortgage) is the underlying standard upon which the rate changes will be made. Indices used include the CD rate, the Treasury Bill rate, the Fed Funds rate, the LIBOR rate and, the new kid on the block, the options ARM.
You must initially understand that an ARM is a loan with an interest rate that moves up or down within a certain set period, and the movements are predicated upon the movements of the underlying index. One such instrument would be Certificates of Deposit-your loan rate would fluctuate up and down with the CD rate. An additional feature of an ARM is that there is an adjustment cap, which prevents the interest from moving up or down too frequently, even if the index does; sometimes this is an advantage if you just adjusted and then rates move upwards. But be aw are, however, that if you just readjusted at a higher rate, and your index rate goes down, you are stuck with the higher rate until the next adjustment period.
Your ARM may be tied to the Treasury Bill rate, which is the rate the US Government pays on its 90 day investments. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank for funds. LIBOR is the London Interbank Offered rate, which is a rate that commercial borrowers pay each other to borrow money.
Which is the right choice depends on your situation circumstances and your view of the direction of interest rates. CD ARMs change every six months, for example, and therefore react more readily to interest rate changes. Rates on Treasury instruments such as the Treasury Bill move more slowly than CDs, and so will react more slowly to interest rate changes. One of the fastest indices to move is the LIBOR, so if you want your interest rate to move frequently, because you think rates are going to decrease, this is a good choice.
As we mentioned, new products are introduced each day, and one of the newest it the option ARM, which allows the borrower to choose how much he wants to pay on his mortgage each month. The idea behind these loans is that they are basically interest only loans, so you have to pay that minimum, and then you have the choice to pay more. Be warned that minimum payment option can result in an increasing, rather than decreasing mortgage, a concept known as negative amortization.
This is a lot of information for the home buyer to digest, and the best solution is to talk to a professional mortgage broker who can explain it all and recommend the best solution for you.
The index of an ARM (Adjustable Rate Mortgage) is the underlying standard upon which the rate changes will be made. Indices used include the CD rate, the Treasury Bill rate, the Fed Funds rate, the LIBOR rate and, the new kid on the block, the options ARM.
You must initially understand that an ARM is a loan with an interest rate that moves up or down within a certain set period, and the movements are predicated upon the movements of the underlying index. One such instrument would be Certificates of Deposit-your loan rate would fluctuate up and down with the CD rate. An additional feature of an ARM is that there is an adjustment cap, which prevents the interest from moving up or down too frequently, even if the index does; sometimes this is an advantage if you just adjusted and then rates move upwards. But be aw are, however, that if you just readjusted at a higher rate, and your index rate goes down, you are stuck with the higher rate until the next adjustment period.
Your ARM may be tied to the Treasury Bill rate, which is the rate the US Government pays on its 90 day investments. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank for funds. LIBOR is the London Interbank Offered rate, which is a rate that commercial borrowers pay each other to borrow money.
Which is the right choice depends on your situation circumstances and your view of the direction of interest rates. CD ARMs change every six months, for example, and therefore react more readily to interest rate changes. Rates on Treasury instruments such as the Treasury Bill move more slowly than CDs, and so will react more slowly to interest rate changes. One of the fastest indices to move is the LIBOR, so if you want your interest rate to move frequently, because you think rates are going to decrease, this is a good choice.
As we mentioned, new products are introduced each day, and one of the newest it the option ARM, which allows the borrower to choose how much he wants to pay on his mortgage each month. The idea behind these loans is that they are basically interest only loans, so you have to pay that minimum, and then you have the choice to pay more. Be warned that minimum payment option can result in an increasing, rather than decreasing mortgage, a concept known as negative amortization.
This is a lot of information for the home buyer to digest, and the best solution is to talk to a professional mortgage broker who can explain it all and recommend the best solution for you.
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