What determines how adjustable-rate loans change?

Posted By Freelance On December 6, 2007 @ 11:00 am In Financing a Home, Consumer News and Advice | Comments Disabled

They go up and down with interest rates, based on several esoteric money market indices that cause the cost of funds for lenders to vary. The most popular indices include Treasury Securities (T-Bills), Cost of Funds (COFI), Certificates of Deposit (CDs), and the Libor, which is the London inter-bank offering rate.

However, the interest rate and payment adjustments do not always coincide. There is usually a lag between the two.

A number of consumer protections have been built into these loans to keep them from fluctuating too wildly. But consumers will have to be cautious when reviewing advertising and other claims about ARMs made by lenders.

Should I avoid an adjustable rate mortgage?

Posted By Freelance On December 6, 2007 @ 10:59 am In Financing a Home, Consumer News and Advice | Comments Disabled

Because adjustable rate mortgages, or ARMs, fluctuate with the market, they offer less stability than fixed-rate loans. If an ARM is adjusted upward, monthly payments will increase, and for a lot of people that can be too big a risk to take. On the other hand, should rates drop dramatically, homeowners can reap the benefits of lower rates without refinancing, thereby saving thousands of dollars.

Lenders first introduced ARMs in the 1980s when interest rates soared into the double digits, forcing many people out of the home buying market. They tied the rate to a variable national index, such as U.S. Treasury bills.

Today, many first-time buyers who have difficulty qualifying for a home loan, still settle for adjustable rate loans because the initial, “teaser” interest rate of the mortgage is normally two or three points lower than a fixed rate loan. ARMs are particularly attractive if you plan to be in your home a short time. They tend to adjust yearly or every three years, usually within certain limits, or caps, that prohibit the interest rate from shooting up too high. Make sure terms such as these are spelled out in any ARM agreement you choose.