Interest rates are a critical component
of a mortgage. Do you want a fixed rate or an adjustable rate??
The answer is not that simple.
Fixed rate mortgages: The interest rate stays the same.
Generally best for people who will live for over 5 years in their
home or need the stability of a fixed rate.
Adjustable rate mortgages (ARMs): Interest rate adjusts
at regular intervals, usually annually; others are fixed for
the first few years and then adjust after the 3rd to 7th year.
ARMs have two components:
1. The Index -
A financial instrument (ie., 30 yearT-Bill) used to set a
base interest rate for your adjustment.
2. The Margin -
A fixed percentage added to your index each year on the change
>Index + Margin = Your Interest Rate
>If 30 year T-bills sold at 6%, and the margin
interest rate is 8.75%
Caps set the max amount of interest rate change; FHA
caps of 1 and 5 mean: the rate cannot change over 1% each year
and never go above or below the start rate by over 5%. Conventionals
usually cap at 2 and 6.
Adjustable rate loans start lower than fixed rates. This allows
buyers to qualify for a more expensive house. If you plan to
move within 3-5 years this product will save you money because
you have a guaranteed average interest rate that will beat the
After that it's a risk in that it will reflect what the overall
economy is doing. In bad times, the mortgage payment can fluctuate
a lot. However, over the past several years adjustables have
been very good buys.
>Mortgages can be confusing.
Mistakes can be costly! >I insist on mortgage
counseling for my clients.
For answers to questions or a referral to a
competent mortgage officer, E-mail me or
call Bob at (800) 295-4007.