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Adjustable Rate Mortgages

What you should know about choosing an Adjustable Rate Mortgage

When the average home buyer thinks about a mortgage loan, the first thing that typically comes to mind is the standard 30-Year fixed rate mortgage. While this is an outstanding loan, the market place offers some extremely attractive alternatives for buyers. This is a brief description of 3 popular adjustable rate mortgage options.

The Adjustable Rate Mortgage

There are many different types of adjustable rate mortgage loans. Instead of reviewing each, below will give you a brief over view of how they work. On all adjustable rate mortgage loans have the following:

Index
Margin
Start rate and or Note rate

Some of the common indexes are the T-bill, 6 month CD, 11^th district COFI and the LIBOR. On any given day you can check your local paper to view the value of your index for the day. The index is the “variable” portion of your loan. The margin is the fixed portion of your loan. A good margin is below 3%. This is what is added to the index value for the day to determine what your new interest rate is when your loan rate is ready to adjust.

Index + Margin = Note Rate

The Negative Amortized loan.

The negative amortized loan works is like all other adjustable rate mortgage programs with a few added options. These are the loans offered in the marketplace with extremely low “teaser” rates (1%). The lender will allow you to pay this low rate; however, they will add the Negative amount to your loan balance each month. Any time you pay less than your note rate your unpaid interest is added to your loan amount. So if you borrow $300,000.00 at the end of the year you could end up owing $309,000.00 or more if you only pay the 1% “teaser” rate. These loan programs are risky and can place many homeowners in danger of loosing their home. But in the certain circumstance they can be of great benefit for the short term.