As if there were not enough decisions to make when you are buying a house and getting a mortgage, lenders now have such a wide rang of ARMs (adjustable rate mortgages) and the borrower even has to choose the index upon which the ARM will be based!
The index is the underlying instrument that is used as a basis for the adjustment of the mortgage rate. Indices can 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.
The rate on an ARM is adjusted periodically upwards, or downwards, depending upon the movement in the general interest rate environment, but tied to a specific instrument. If your index is CDs, and CDs go up, your mortgage rate increases. ARMS also contain adjustment caps, so that you can limit your exposure as to how high your loan rate can go, even if your index rate continues to go up, which is good if you just had an adjustment, and the rates go up again. 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.
There are any number of ARM indices, and they include the CDs, LIBOR and government bonds mentioned. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank for funds. Another popular index used by a lot of lenders is the LIBOR, or the London Interbank Offered Rate, which well rated international companies pay to borrow.
The index is an individual choice, based on the individual mortgage, and how the borrower feels interest rates will behave. If you have an ARM that uses CDs as its base, you can expect it to be very responsive to market moves. ARMs that have the Tbill rate as the index do not move as often as the CD index. LIBOR is one of the fastest moving indices, so if you want to take advantage of rapidly falling interest rates, this is the one to use.
An interesting, and possibly dangerous choice in interest rate choices is the option ARM, which permits the borrower to pick the "option" of choosing his mortgage payment each month. The mechanism behind these loans is that they are interest interest only loans, so you have to pay that minimum, and then you can choose to pay more. There is a real danger in option mortgages that the mortgage will end up with negative amortization, which means the mortgage balance goes up instead of decreasing as it normally would.
With all of these choices, a potential borrower should really talk to a professional mortgage broker who understands the various products and can help you choose the best one for you. - 29969
The index is the underlying instrument that is used as a basis for the adjustment of the mortgage rate. Indices can 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.
The rate on an ARM is adjusted periodically upwards, or downwards, depending upon the movement in the general interest rate environment, but tied to a specific instrument. If your index is CDs, and CDs go up, your mortgage rate increases. ARMS also contain adjustment caps, so that you can limit your exposure as to how high your loan rate can go, even if your index rate continues to go up, which is good if you just had an adjustment, and the rates go up again. 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.
There are any number of ARM indices, and they include the CDs, LIBOR and government bonds mentioned. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank for funds. Another popular index used by a lot of lenders is the LIBOR, or the London Interbank Offered Rate, which well rated international companies pay to borrow.
The index is an individual choice, based on the individual mortgage, and how the borrower feels interest rates will behave. If you have an ARM that uses CDs as its base, you can expect it to be very responsive to market moves. ARMs that have the Tbill rate as the index do not move as often as the CD index. LIBOR is one of the fastest moving indices, so if you want to take advantage of rapidly falling interest rates, this is the one to use.
An interesting, and possibly dangerous choice in interest rate choices is the option ARM, which permits the borrower to pick the "option" of choosing his mortgage payment each month. The mechanism behind these loans is that they are interest interest only loans, so you have to pay that minimum, and then you can choose to pay more. There is a real danger in option mortgages that the mortgage will end up with negative amortization, which means the mortgage balance goes up instead of decreasing as it normally would.
With all of these choices, a potential borrower should really talk to a professional mortgage broker who understands the various products and can help you choose the best one for you. - 29969
About the Author:
Thank you for reading our article.Just click oncanada life insurance onlineandassurance-vie
