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Great Mortgage Rates during election years

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Published On : 07-16-2004
Author : Steve Donegan
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Wow, I sure love election years because interest rates generally fall into the basement.  That is one reason I firmly belive in a 5-7  year ARM.  I found a good article about Adjustable Rate Mortgages on www.nahb.com

Adjustable Rate Mortgages (ARMs)
With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to a specific index such as a cost of funds rate or the Treasury bill rate. Payments may go up or down accordingly. Adjustable-rate mortgages (ARMs) are characterized by the time frame for adjustment, such as 1 year, or 3, 5, 7, or 10 years. Hybrid ARMs have grown in popularity because they may offer a favorable fixed rate of interest for a time, such as 3, 5, 7, or 10 years, after which the loan becomes a 1-year ARM.


Lenders generally charge lower initial interest rates for ARMs and Hybrid ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the anticipated monthly payments for the few year or two. Moreover, if interest rates remain steady or move lower, your ARM could be less expensive over a long period than a fixed-rate mortgage.


Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off: you get a lower rate with an ARM in exchange for assuming more risk.

 

Here are some things to consider with an ARM or a Hybrid ARM:

  • Is my income likely to increase enough to cover higher mortgage payments if interest rates go up?
  • How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not present the risk they do if you plan to own the house for a long time.)
  • Can my payments increase even if interest rates generally do not increase?
  • What index will be used to adjust the mortgage rate? Ask the lender for a table showing movements in the index over the previous 10 years to see how your mortgage payments would have changed.
  • How often will the interest rate be adjusted? Every year? Three years? Five years? The longer the adjustment period, the better you will be able to plan your future loan cost.
  • What is the initial mortgage interest rate? Does it include a special discount or “teaser?” If so, you could face a large increase in your monthly payments when the interest rate is adjusted for the first time.
  • What is the margin on the interest rate? The margin is the amount that the lender adds to the index rate to calculate your mortgage rate. For instance, if the index rate is 7 percent and the margin is 2 percent, your overall interest rate would be 9 percent.
  • What limits or caps have been placed on the adjustments? One of the most important items to discuss with your lender is the maximum amount that your mortgage rate can increase in any single adjustment period and over the life of the loan. Find out the "worst case" situation in the event of a sharp increase in your index rate.
  • Is the loan convertible? If so, is there a cost to convert? Convertibility allows you to change your ARM to a fixed-rate loan at some designated time in the future.
  • Is there a prepayment penalty? If you sell your house and pay off your loan early, you may be assessed a fee.

 

These types of loans could be right for you.  I think society requires people move around more than they used to.  Most of the people we build homes for, move 2-4 years later.  I'm sure that the majority of those who moved, thought they would be in their home much longer.  Unless you are really sure you are going to be in your home for the long haul; you should look into the ARM.

By the way, rates have fallen 4 weeks in a row.  Better hurry!

Happy home Plan Hunting

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