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I just added the following information on Adjustable Rate Mortgages this morning.
== ARM (Adjustable Rate Mortgage)==
An adjustable-rate mortgage, aka ARM, usually has a fixed interest rate period, followed by a period of fluctuating interest. The fixed period can range from as short as one month to as long as 10 years. ARM's are always linked to an index. These indices are usually published numbers such as the LIBOR rate, treasury bill or bond rates, or the Cost-of-Funds Index. The lender then adds their margin on top of this index. A good place to look at historical index numbers is [http://www.forecasts.org Forecasts.Org].
These loans act just like fixed rate loans during the initial fixed rate period. However, as soon as the loan begins to adjust, things can change and quickly. Lenders differ on margins that are added to the index rate and they differ on how fast the rate can adjust. Recent trends though show that the rates can go to their max rate on the first adjustment, which can almost double your interest rate when you move from the fixed period to the adjustable period.
The strategy behind using these loans are to either maximize monthly cash flow or to get the best rate if you know that your time in the home will be limited. These loans are less popular in times with an inverted yield curve (see [http://money.cnn.com/markets/bondcenter/index.html BondCenter on Money.cnn.com]), because they offer rates that are close to longer term fixed rates, so the risk is not worth the reward. With an inverted yield curve, the short term rates, carry the same or higher risk as the long term rates. Normally, the yield curve shows that rates are lower with shorter terms, which makes sense. If I was to lend you money today for 6 months, I will not loose much buying power on that money over six months, so the interest rate I will charge will be less. However, if I loan you money for 30-years, the money will have significantly less buying power 30-years from now, therefore, I need to charge a higher interest rate. This is inflation risk priced into interest rates.
Labels: Buyers, Financing, General Real Estate News, Interest Rates
posted by jkballentine @ 1:22 PM
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