Tips & Tools : ARM

Finding the Right Home Loan

RE.com Tips & Tools — Fri, 03 Aug 2007 18:44:00 GMT

Weigh your options to find the right home loan for you.

Finding the right home loan is all about saving money. You took your time finding the right house – shouldn’t you also carefully evaluate the financing for that home? When finding the right home loan, there are several factors to consider. What is your financial situation? How much of a down payment do you have? What are current interest rates? How long do you plan to stay in the new home? Consider these factors, plus others, to help you find the right home loan for you.

How long will this be your address?
Let’s start with how long you plan to stay in the home. While no one can know the future with certainty, you can probably make a good guess as to how long you’ll stay. If you know your job will require a transfer in a few years or if you’re self-aware enough to know that you’re part nomad, then this will affect what home loan you choose. If, however, your job doesn’t move you around and you are the type who likes to put down roots, then a different type of home loan may be better for you.

• If you may move soon
If you think you may move again within 4 to 5 years, you have may want to consider several different options for the right home loan. If rates are low, you may want to consider a short-term fixed rate mortgage (such as a 10 or 15-year fixed loan) to build up equity for your short time in the home. Another option to consider is an adjustable rate mortgage (ARM) or a hybrid loan. An ARM gives you a lower interest rate than typically offered with a fixed rate mortgage. The catch is that the ARM’s interest rate changes. A hybrid loan gives you the benefit of an ARM’s lower interest rate, but the security of a fixed loan because there is a fixed period before the rate resets. If you plan to move relatively soon, it may turn out that you sell the house before your rate adjusts.

• If you’re in it for the long haul
If you won’t be moving again anytime in the near future, then a fixed rate mortgage may be the right loan for you, especially if interest rates are low. A 15-year or 30-year fixed rate mortgage can be the perfect fit if you plan to stay in the home for a long period of time and you prefer the security of knowing what your interest rate (and monthly payments) will be. You can lock in a good interest rate that is guaranteed to you for the 15 or 30-year term of the mortgage.

What about down payment options?
Finding the right home loan also means evaluating options for your down payment. The 20 percent down payment is not necessarily the standard these days.

• No-down-payment mortgage
Yes, you read that right. It is possible to get a mortgage without putting any money down. That means that you finance 100 percent of the purchase price of the home. Sounds pretty scary, right? But, sometimes it can be a viable option. If you live in a market with rapidly escalating prices, it may not be that possible for you to save 10 to 20 percent of the purchase price before being priced out of the market. With a no-down-payment mortgage, you’ll get a higher interest rate and you’ll have to pay PMI (private mortgage insurance). Also, it’ll take you longer to build up equity since you didn’t put any money down. Keep in mind that not having equity in your home can be dangerous if home prices fall.

• Piggy-back loan
Another way to finance a home if you don’t have enough for a 20 percent down payment is a piggy-back loan. Basically, A piggy-back loan is a combination of two loans that close at the same time to allow you to purchase a home. The most common types of piggy-back loans are an 80/20 mortgage, an 80/15/5, or an 80/10/10. An 80/20 means that you finance 80 percent of the home’s purchase price through a first mortgage, but the other 20 percent comes from a second mortgage. An 80/10/10 means that you finance 80 percent of the purchase price via a first mortgage, 10 percent from a second mortgage, and that you make a down payment of 10%. With a piggyback loan you avoid PMI, but your second loan often will have a higher interest rate. Still, this can be a good option if you don’t have enough for a 20 percent down payment.

• FHA loan
For the first-time homebuyer, the government runs a program to help you realize the dream of homeownership. An FHA loan lets you get in with as little as 3 percent down. This really just scratches the surface for your options in finding the right home loan. Know your financial situation and investigate all of the mortgage options so that you can get the right home loan for you.

Borrowers need to understand pros and cons to make the right choice

RE.com Tips & Tools — Wed, 01 Aug 2007 19:07:00 GMT

Borrowers need to understand pros and cons to make the right choice.

First-time home buyers often struggle to understand the differences between various types of fixed-rate, adjustable-rate and hybrid mortgages. One way to simplify these comparisons is to review the basic elements of each type of home loan. Here’s a summary:

Pros and cons of fixed-rate mortgages
The chief advantage of a fixed-rate mortgage is that the interest rate and monthly payments will remain exactly the same for the entire lifetime of the loan, be it 15 years or 30 years. There is no uncertainty with this type of mortgage as neither the interest rate nor the payment will ever be higher or lower than they were when the loan was originated. Fixed-rate mortgages also are easier to understand than more complicated adjustable-rate and hybrid mortgages.

Pros and cons of adjustable-rate mortgages
The chief advantage of an adjustable-rate mortgage, or "ARM," is that you may have lower initial monthly payments. This is because ARMs often offer a low initial interest rate on the loan. You therefore have the potential to save money in lower interest costs if the interest rate on your ARM remains lower than the rate available for a fixed rate mortgage.

Despite those advantages, ARMs are inherently more risky than fixed-rate mortgages. If the initial interest rate on an ARM is lower than the fully adjusted rate, the rate and the monthly payment can increase significantly at each adjustment period. Over time, an ARM can turn out to be more costly than a fixed-rate loan would have been. Since there is no way to predict future interest rates, borrowers should pay considerable attention to just how high their monthly payments can get.

Pros and cons of Hybrid ARMs
A hybrid ARM offers a compromise of sorts between the advantages of a fixed-rate loan and the advantages of an ARM. The interest rate on a hybrid is fixed for a set number of years before the first adjustment. Borrowers who intend to move or refinance their mortgage within the fixed-rate period may benefit from the lower initial interest rate that may be offered on a hybrid ARM. The longer the fixed rate lasts, the less risky the loan will be and the higher the initial interest rate will be.

It’s also a good idea to pay attention to the spread between the interest rates on various loan products. For example, the spread between a fixed rate of 6.5 percent and an adjustable rate of 4.5 percent would be 2 percent while the spread between a fixed rate of 6.8 percent and an adjustable rate of 4.2 percent would be 2.6 percent. The larger the spread is, the more potential savings the riskier ARM loan offers over time. When the spread is narrow, a fixed-rate loan is generally considered more attractive.

For more help choosing the right home loan for you, read our article Finding the Right Home Loan.

Is Your ARM About to Reset?

RE.com Tips & Tools — Fri, 04 May 2007 20:38:00 GMT

by Brenda Spiering – RealEstate.com

Are you one of the 10 million homeowners in the country with an adjustable rate mortgage (ARM)? If so, you may be concerned about what your payments are going to be after its interest rate resets. Depending upon when you took out the mortgage and how long your initial rate period was, you could be facing a substantial rate increase.

The Mortgage Bankers Association reports that today nearly 25 percent of mortgages carry adjustable interest rates. It’s not surprising considering the savings they’ve provided over the past few years. In 2003, for example, the interest rate on a 30-year fixed-rate loan was around 6.5 percent, whereas ARM rates were under 4 percent.

But this year nearly $1.5 trillion worth of ARMs are due to reset at a higher rate. Not only have interest rates increased but the gap between the interest rate available through fixed and adjustable rate mortgages has narrowed. Those who took out an ARM for less than 4 percent back in 2003, for example, could see their mortgage rate jump to 7.5 percent after adjustment.

If your mortgage is resetting at a higher rate, keep in mind that your low-interest ARM means you’ve most likely already saved several thousand dollars a year in interest during the first few years of your mortgage. And the fact that mortgage interest is usually tax deductible means that when your rate resets there may be less net impact than you may expect on your overall finances.

If you’re concerned interest rates may continue to rise and want the security of knowing your monthly payment won’t rise to an unaffordable level, you may want to consider refinancing to a fixed-rate loan. You needn’t worry that you’ve missed the boat in terms of locking in a good rate; today’s rates are still among the lowest in history.

It may not be worth your while to refinance to a fixed-rate loan if you plan to move soon. But remember, the money you saved during most of the years you lived in your home will likely more than off-set a short period of higher interest payments just before you sell your home.

No matter what your situation, it’s important to be prepared for your rate adjustment. You may want to calculate how much you will pay after your ARM adjusts and find out about all of your available options. By knowing what to expect and by planning ahead, you can stop worrying about what the future may hold and start coming up with a solution that can meet your financial needs.

Visit the new LendingTree ARM Central Web site to calculate your adjusted payments and get objective information on everything you need to know about adjustable rate mortgages.

Adjustable Rate Mortgages (ARMs)

RE.com Tips & Tools — Thu, 25 Jan 2007 20:09:00 GMT

An ARM is a mortgage in which the interest rate is adjusted periodically based on an index.

With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Adjustable Rate Mortgages

At-A-Glance

Pro	Con
Lower initial interest rates	Lower rate means you potentially assume more risk
If interest rates remain steady or decrease, could be less expensive over time	If interest rates increase, you’ll be faced with higher monthly payments in the future

TIP: Before deciding that an ARM is right for you, ask yourself these questions:

Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem 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?

The Basic Features

The Adjustment Period: With most ARMs the adjustment period occurs every one, three or five years, resulting in a change in your interest rate and monthly payment.

The Index: Most lenders tie ARM interest rate changes to changes in an index rate. These indexes usually go up and down with the general movement of interest rates, making your monthly payment amount rise or fall accordingly.

The Margin: To determine the interest rate on an ARM, lenders add to the index rate a few percentage points called the margin. The amount of the margin can differ from one lender to another, but it is usually constant over the life of the loan.

This information is adapted from "Consumer Handbook on Adjustable Rate Mortgages" published by the Federal Reserve Board and the Office of Thrift Supervision.

Step 7: Choosing the Right Mortgage

RE.com Tips & Tools — Fri, 19 Jan 2007 19:44:00 GMT

One of the most critical steps in buying a home is finding the right mortgage.

For most people, buying a home is impossible without getting a mortgage, and because it is a major financial commitment, you should find the mortgage that is right for your situation.

A good way to start is to educate yourself. Understanding the different types of loans available, and the pros and cons of each, is important. Make sure you consider how long you plan to be in your home, your risk tolerance, and if you expect your income to rise, fall or stay the same.

Some of the mortgage products available are listed below.

Fixed Rate Mortgages

With a fixed rate mortgage, the interest rate and monthly payments stay the same for the life of the loan.

These mortgages are usually fully amortizing, meaning that your payments combine interest and principal in such a way that the loan will be fully paid off in a specified number years. A 30-year term is the most common, although if you want to build equity more quickly, you might opt for a 15- or 20-year term, which usually carries a lower interest rate. For homebuyers seeking the lowest possible monthly payment, 40-year terms are available with a higher interest rate.

Consider a fixed rate mortgage if you:

are planning to stay in your home for several years.
want the security of regular payments and an unchanging interest rate.
believe interest rates are likely to rise.

Adjustable Rate Mortgages (ARMs)

With an adjustable rate mortgage (ARM), the interest rate changes periodically, and payments may go up or down accordingly. Adjustment periods generally occur at intervals of one, three or five years.

All ARMs are tied to an index, which is an independently published rate (such as those set by the Federal Reserve) that changes regularly to reflect economic conditions. Common indexes you’ll encounter include COFI (11th District Cost of Funds Index), LIBOR (London Interbank Offered Rate), MTA (12-month Treasury Average, also called MAT) and CMT (Constant Maturity Treasury). At each adjustment period, the lender adds a specified number of percentage points, called a margin, to determine the new interest rate on your mortgage. For example, if the index is at 5 percent and your ARM has a margin of 2.5 percent, your “fully indexed” rate would be 7.5 percent.

ARMs offer a lower initial rate than fixed rate mortgages, and if interest rates remain steady or decrease, they may be less expensive over time. However, if interest rates increase, you’ll be faced with higher monthly payments in the future.

Consider an adjustable rate mortgage if you:

are planning to be in your home for less than three years.
want the lowest interest rate possible and are willing to tolerate some risk to achieve it.
believe interest rates are likely to go down.

Hybrid Mortgages

A hybrid mortgage combines the features of fixed rate and adjustable rate loans. It starts off with a stable interest rate for several years, after which it converts to an ARM, with the rate being adjusted every year for the remaining life of the loan.

Hybrid mortgages are often referred to as 3/1 or 5/1, and so on. The first number is the length of the fixed term -- usually three, five, seven or ten years. The second is the adjustment interval that applies when the fixed term is over. So with a 7/1 hybrid, you pay a fixed rate of interest for seven years; after that, the interest rate will change annually.

Consider a hybrid mortgage if you:

would like the peace of mind that comes with a consistent monthly payment for three or more years, with an interest rate that’s only slightly higher than an annually adjusted ARM.
are planning to sell your home or refinance shortly after the fixed term is over.

Option ARMs

Also called “flex ARMs” or “pick a payment mortgages,” these are adjustable rate mortgages with a twist. Each month, rather than paying a set amount, you’ll receive a statement with up to four payment options, ranging from a small minimum to a fully amortized payment. You select the amount you want to pay each month.

Option ARMs entice borrowers by offering initial low minimum payments, but after an introductory period, the required minimum rises substantially. In addition, if you choose the minimum payment option too often, you won’t build equity in your home and may even end up increasing your loan’s balance.

Consider an option ARM if you:

want flexibility because you have a fluctuating income -- for example, if you’re self-employed or work on commission.
are financially disciplined and won’t be tempted to simply pay the minimum every month.

Interest-Only and Balloon Mortgages

Unlike an amortized mortgage where you pay a combination of interest and principal each month, with an interest-only mortgage you pay only interest for a fixed period -- usually from five to 10 years. This means the principal never goes down, and after this period has elapsed you have to either pay the entire principal off or start paying down the principal, which results in much higher monthly payments.

Balloon mortgages also offer low regular payments for a number of years (often just slightly below what you’d pay for a 30-year fixed rate mortgage). After this fixed period, the principal must be repaid as a lump sum, which generally means refinancing. Because very little of the principal has been paid down, once again, your payments will increase.

These loans can be helpful temporarily, but they don’t allow you to build equity in your home, and they can cause serious financial strain when the principal comes due.

Consider an interest-only or balloon mortgage if you:

are buying a home with the expectation of an improvement in your financial situation -- for example, you have a large debt that will be paid off in a few years.
want to stay in your current home but are experiencing a temporary financial squeeze -- for example, you are going back to school, or taking a few years off to stay home with your children.

The Details

Once you know what type of loan is right for you, look at the specifics. First, of course, is the interest rate. Remember, however, that the rate you’re offered may not tell the whole story. Are there closing costs, points or other charges tacked on? Make sure you ask for the loan’s annual percentage rate (APR), which adds up all the costs of the loan and expresses them as a simple percentage. Lenders are required by law to calculate this rate using the same formula, so it’s a good benchmark for comparison.

The features of your loan -- which may be buried in small print -- are just as important. A favorable adjustable-rate loan, for example, protects you with caps, which limit how much the rate and/or monthly payment can increase from one year to the next. Ask whether a mortgage carries a prepayment penalty, which may make it expensive to refinance. And don’t be seduced by low monthly payments -- some of these loans leave you with a large balloon payment due all at once when the term is up.

Tips for buying in an expensive housing market

RE.com Tips & Tools — Fri, 12 Jan 2007 20:33:00 GMT

By exploring different loan options, you can purchase a home even in an expensive housing market.

In recent years, housing prices have soared across most of the country. But there are still affordable ways to become a homeowner. Lenders offer many innovative, nontraditional loan products that can help you buy a home. Here are a few of the available options:

Interest-only mortgage

With an interest-only mortgage, you are only required to pay the interest each month for a fixed period of time -- usually between five and 10 years. The loan then converts to a regular mortgage, typically amortized over 20 to 25 years. (In some cases, you may also be able to pay down some of the principal during the interest-only period.) Because an interest-only mortgage gives you a lower initial mortgage payment, it may enable you to carry the payments on a home that you would otherwise be unable to afford. It can be particularly useful if you are anticipating a rise in your level of income. The downside, however, is that at the end of the initial term you must be prepared to start paying off the loan by making substantially higher mortgage payments or be prepared to sell your home.

Adjustable rate mortgage (ARM)

In the case of an adjustable rate mortgage (ARM), you get a lower initial interest rate than you do with a fixed-rate loan. The interest rate changes periodically, however, in relation to an index and your rates go up or down accordingly. One of the benefits of an ARM is that, because your initial payments are lower, you may be able to qualify for a higher loan amount and afford a more expensive home. While you must assume the risk of possible future rate increases, it can still be a good option, particularly if you plan to sell your home soon anyway.

40 year or 50 year mortgages

Another nontraditional mortgage option that can help you buy a home, is a 40- or 50-year mortgage. Because you repay the loan over 40 or 50 years, as opposed to the more standard 15 to 30 years, your monthly payments are lower. The only drawback is that these mortgages typically carry slightly higher rates and, because you’re making payments over a longer period of time, you will end up paying more interest. Still, they can be a good option if you’re at an early stage in your career. And, should your income rise, you can always refinance to a shorter-term mortgage.

Keep in mind that while these products make it easier to buy a more expensive home, they also carry more risk than a traditional 30-year fixed-rate mortgage. Always “stress test” your mortgage with a worst-case scenario (falling home prices, rising interest rates) to make sure you can afford the home. If you are uncomfortable with whether you can truly afford your housing payments, renting may be a better option for you. In some housing markets with very high prices, renting can be a better deal.

Even in an expensive housing market, chances are there’s a type of mortgage that can help you buy a home. Contact a lender to find out what program may work best for you.