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 decide upon the index upon which the ARM will be based!
The index is the underlying instrument that is utilized as a basis for the change of the mortgage rate. Various indices are used, including government treasury instruments, the Fed Fund rate or LIBOR.
The basic concept of an ARM is that the interest on the loan is adjusted up or down, periodically, based on a chosen underlying interest rate that is indicative of interest rates in general. One such instrument would be Certificates of Deposit-your loan rate would fluctuate up and down with the CD rate. ARMs have rate adjustment caps, which means that the rate on your mortgage will only go up at certain intervals (every three or six months, for example), so that when the CD rate goes up, you may not have an increased rate for a few months, if your rate just adjusted recently. This can be a disadvantage if you have just readjusted, and then there is a downward movement, however.
ARMs can be tied to a lot of underlying instruments, for example the 90 day U.S. Treasury Bill. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank to borrow money. LIBOR, the London Interbank Offered Rate, is another popular index, and is the rate used by large global companies to borrow.
The index is a personal 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 interest rate moves. Rates on Treasury instruments such as the Treasury Bill change more slowly than CDs, and so will react more less to interest rate changes. LIBOR is the index that moves the most frequently and the most rapidly, so if you want to take frequent advantage of the downward level of decreasing rates, this is the index for you.
As we said, new products are introduced each day, and one of the newest it the option ARM, which allows the borrower to pick how much he wants to pay on his home loan each month. There is a minimum payment that allows for the interest (so the bank gets its money) and then the other options will pay off some portion of equity. Those using this option should be aware of negative amortization, because they may never repay any of the loan if they always choose the lowest amount.
With this dizzying choice in interest rate options for your mortgage, the best option is to meet with a mortgage expert who can explain all of them to you and advise you best on your needs. - 29971
The index is the underlying instrument that is utilized as a basis for the change of the mortgage rate. Various indices are used, including government treasury instruments, the Fed Fund rate or LIBOR.
The basic concept of an ARM is that the interest on the loan is adjusted up or down, periodically, based on a chosen underlying interest rate that is indicative of interest rates in general. One such instrument would be Certificates of Deposit-your loan rate would fluctuate up and down with the CD rate. ARMs have rate adjustment caps, which means that the rate on your mortgage will only go up at certain intervals (every three or six months, for example), so that when the CD rate goes up, you may not have an increased rate for a few months, if your rate just adjusted recently. This can be a disadvantage if you have just readjusted, and then there is a downward movement, however.
ARMs can be tied to a lot of underlying instruments, for example the 90 day U.S. Treasury Bill. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank to borrow money. LIBOR, the London Interbank Offered Rate, is another popular index, and is the rate used by large global companies to borrow.
The index is a personal 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 interest rate moves. Rates on Treasury instruments such as the Treasury Bill change more slowly than CDs, and so will react more less to interest rate changes. LIBOR is the index that moves the most frequently and the most rapidly, so if you want to take frequent advantage of the downward level of decreasing rates, this is the index for you.
As we said, new products are introduced each day, and one of the newest it the option ARM, which allows the borrower to pick how much he wants to pay on his home loan each month. There is a minimum payment that allows for the interest (so the bank gets its money) and then the other options will pay off some portion of equity. Those using this option should be aware of negative amortization, because they may never repay any of the loan if they always choose the lowest amount.
With this dizzying choice in interest rate options for your mortgage, the best option is to meet with a mortgage expert who can explain all of them to you and advise you best on your needs. - 29971
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