I heard the news about another interest rate hike and thought it was about time to glance into refinancing my mortgage. I contacted my mortgage company first.
“I am interested in a fixed mortgage rate.” I said.
“May I ask why that is?” The broker asked politely.
“I don’t fancy to deal with the risk of Looking at your last ten years of account, you have done pretty well with the adjustable rate. Actually, you had paid less in interest than most people with a fixed loan. May I propose that we look at several adjustable rates, which are even less than the rate you’re paying and with caps you don’t have to bother about the interest rate hikes. I think we can save you a few hundred dollars off your monthly payment.”
At this instant the broker took a rest so that I can say, “No thank you. I am only interested in a fixed rate mortgages.” “I don’t understand. Are you not interested in saving money?” He asked before introducing into a sermon that had a mix of economy 101, budgeting 1, a dash of fortune telling and a healthy and totally unrealistic optimism of future trend in interest rates.
When he was finished I explained to him that I recall the 18%-19% interest on mortgage loans in the early 1980′s that he appeared too young to remember. I pointed out that on a $100,000 loan, the 18% interest is $1,500 per month on the mortgage interest alone. If you have a $200,000 loan the interest alone would be a back-breaking payment of $3,000 per month.
I understood he thought I am out of my mind thinking about an 18% mortgage interest rate in today’s environment. At the end we finished the phone conversation without any solution. The gap in understanding wasn’t about fixed rate mortgages vs adjustable rate mortgages (ARM). The gap was in age, experience, expectation, hopes and fears; a gap too wide to bridge.
To understand this gap, let’s look at the adjustable rate mortgages. This type of mortgage loan is normally lower than the fixed rate and the lower rate means lower payment that in turn means simpler qualification.
When loaners are considering your mortgage loan application, they look at what percentage of your income is available for repaying their loan. With an income of $5,000 per month, a $2,000 loan payment is 40% of your income and a $1,000 payment is 20% of your income. The earlier you get to $1,000 or 20% of your income, the easier it is to be eligible for the loan. This easier qualification attractcs to younger people who are just commencing and those with income limitation.
Adjustable mortgage rates suit to young people with an innate optimism, hopes of increased income and the high opportunity of moving to a different home in a short period of time. In search of advice from mortgage professionals like Edmonton Mortgage they require to look at what they can afford to pay and cannot worry too much about the distant future. To them something is better than leasing which is an absolute waste of money.
There are also those older persons who have suffered from some set back in life and do not enjoy a high credit score or do not have a very high income. Since a poor credit score surges the interest rate a bank offers to potential borrowers, a fixed rate may be too high for these individuals to think over.
Let’s take a look at a number terms that help you understand ARM better. Other alternative is to seek an advise from experts like Edmonton Mortgage.
Margin – This is the loaner’s markup and where they make their proceeds. The margin is supplemented to the index rate to find out your total interest rate.
ARM Indexes – These are benchmarks that loaners use to verify how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. Think overboth the index and the margin when you are shopping around.
Adjustment Period – Refers to the holding period in which your interest rate will not vary. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.
Interest Rate Caps – This is the greatest interest a lender can charge you.
Periodic caps – The loaners may limit how much they can raise your loan within an adjustment period. Not all ARMs have periodic rate caps.
Overall caps- Mortgage lenders may also limit how much the interest rate can raise over the life of the loan. Overall caps have been neededby law since 1987. Payment Caps – The maximum amount your monthly payment can add to at each adjustment.
Negative Amortization – In most cases a fraction of your payment goes toward paying down the principal and reducing your total debt. But when the payment is not enough to even cover the interest due, the unpaid amount is added back to the loan and your total mortgage loan obligation is greater than before. In short, if this carries on you may owe more than you started with.
Negative amortization is the probable downside of the payment cap that sets aside monthly payments from covering the cost of interest.
As you compare lenders, loans and rates remember Henry Moore who said, “What’s important is finding out what works for you.”
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