Adjustable Rate Home Loan

by Thinking about ARMs

Ask Kate about 4 year adjustable rate home loan programs: Hi Kate, I am thinking about combining my truck loan with my mortgage loan. Is refinancing to a 4 year ARM a good or bad idea? Can you tell me if an ARM is a good idea or bad idea because my bank has offered me a 4 year adjustable rate home loan.

Kate Answers: 4 Year Adjustable Rate Home Loan

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Adjustable rate home loan programs rival the number of stars in the sky.

Some gurus swear by adjustable mortgage products. Others tell you to run away and don't look back. So who is right? Both... followed by "but".

Here's the thing. While adjustable rate home loan programs may work well for one homeowner, the very same loan could spell disaster for another.

The trick is in identifying your goals, proper planning and getting answers from your lender.

Planning Before You Get an ARM

Are adjustable rate home loan programs good or bad? The answer depends on your goals and circumstances. Go to Adjustable Mortgage Rates for more help on this.

Avoiding ARM Surprises

Understanding your ARM helps you anticipate and avoid surprises. With proper planning, an adjustable rate home loan can be manageable. Click here to learn How To Avoid ARM Surprises.

Questions to Ask Your Mortgage Originator

Now for questions. Scroll down Easy Path To Low Mortgage Payments until you reach Adjustable Rate Mortgage (ARM) Questions. You will find a number of questions that are crucial to ask. Take notes when you ask these questions and write back if you aren't sure about answers you get.

Good luck and best wishes,

Ask Kate

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Adjustable Rate Mortgage Lingo
by: Mary A. from San Diego, CA

Kate, here's what a lender responded to us, when searching for a $1,100,000 loan on a $1,850,000 property:

Loan Amount: $1,000,000+, 40 year term, Interest only at the years stated below then fully amortized for the remaining years after that period.

5/1: 3.75% No points OR 3.375% Buy down with 1 point.

7/1: 4.125% No points OR 3.875% Buy Down with 1 point.

10/1: 4.625% No Points OR 4.375% 1 point.

The borrowers would need to qualify at the rate plus 2% Fully amortized

Hi Mary, Kate here...

That's a ton of lingo which can prove to be a hindrance to borrowers who are trying to make an educated decision about their mortgage.

Let me see if I can break it down.

The offer is for loan amounts of at least a million dollars which must be paid back in 40 years.

For either 5, 7, or 10 years (depending on which option you choose), your house payment will consist of paying the interest charges. Think of this as treading water. While not drowning, you also are not making any progress.

After the set period of time is up, your interest rate will begin to adjust annually. (This is the 1 of the 5/1, 7/1, and 10/1 mentioned above.)

Fully amortized refers to the interest rate being sufficiently adjusted to guarantee that your mortgage will be paid off in 40 years. Go here to read more about mortgage amortization.

You have the option of a lower rate and higher loan fee (aka points). This is a buy-down. Or you have the option of a higher rate and lower points. This is a a buy-up. Read more about buy-ups, buy-downs, and discount points here.

For many years, borrowers chose adjustable rates to qualify for larger loan amounts. This was made possible because of the teaser rate, a below-market rate as an enticement, for qualification purposes. But it is more common now for borrowers to be qualified at the current market rate plus another 2% to make sure they can handle future increases in the rate.

Best wishes, Kate

P.S. Do not forget to ask about prepayment penalties and balloon payments, common to adjustable rate mortgages.

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