Adjustable Rate Mortgages also known as ARM Loans for homes-by MillerEld

May 22,2011,by:  Cheryl MillerEld, webmaster/web content writer/blogmaster


--------------Adjustable Rate Mortgages also known as ARM Loans for homes--------------


     The loan everybody said !!NOT!! to get, said the home loan prospect and first-time-home buyer,


      I was sitting down with in my office at Landmark Mortgage in Boise, Idaho.   The appointment with me (his mortgage broker) was the initial paperwork and consultation interview for pre-qualifying to buy a home. 


      A home loan is the objective of the relationship with me, finding the right money sources and loan under writting policies that  the prospect qualifies for,  and terms that will be a perfect fit for the prospect - as 'new' owner of a home and mortgage loan. 


      Why do some new home buyers end up in an adjustable rate mortgage (ARM) loan?   


Plainly advertised at very low start rates, these loans help the debt heavy borrower, or bulky payment candidates whose eyes are bigger that their wallets.


      To debt-ratio the folks with some debt and or larger than normal house payment estimate, the mortgage broker has little room to play when money sources' guidelines dictate the ratio acceptable to their loan programs.  Therewith, this leaves another avenue of approach,  the intitial interest rate a loan begins it amortization journey with may be lowered intentionally to attract mortgage brokers in the field to notice a "teaser-rate" opportunity to shrink the house payment a while, ease them into owning.  As well, the ratio figures line up now that the incredibly low interest rate starts of the series of house payments.   


     The "teaser-rate" has an unfortunate ending at the contract specified date usually one-year after closing, sometimes only 6-months and rolls to an adjustable rate mortgage on the home. 


      Now, the home loan is in an ARM.    No biggy if the details are discovered early enough to do a little homework on the ARM home loans.   Usually excited nervous home buyers don't sweat any of the financing details.   The color choice of the wallpaper and curtains maybe, but not the financing.


      The little details of importance are:  the marging, the index, the ceiling the hikes to the rate, the timing of adjustment (every 6-months, every year?).     What these are will soon be known to you.


      The margin is a fixed integer number with decimal and some percentage of a whole number.  I offer the example of:   5.55  or  2.50 or 6.75.   This little goodie is obviously advertised to your mortgage broker and he/she should know what a margin on an ARM is, but may skip over telling you about what a margin on an ARM can or can't do for you the home buying prospect.


       Margins are important because they attach to the index-rate.  Together the form "the rate" that your home loan is based on.   One changes the other does not ever change on this loan once it is closed and funded.    Guess which does not ever change?  The margin does not ever change.  The index floats and has been historically tracked and its history is openly documented.   An index currently down is bound to float up.  The tallest spike in the index histogram is achievable again and when,,,,well most of us wouldn't know.    So a Libor index on a 6.00 margin at a cap of 16.50 with a teaser rate of 5.25 for the first year of the loan, looks attractive for the entry and powerfully dismal thereafter.   If the Libor index is floating at about 5.125 then the rate at time of adjustment will roll to 11.125, then in 6-months or one-year (depending on the loan program), Libor index is hovering around 3.75, what will the rate be this time when it rolls (adjusts) - 9.75 - correct.    What could the loan rate jump up to as it rises and rises and rises?   16.50 is where it should cap.   Does that make you a little nervous about this loan.   Does me.   


       Indexes used come in a variety of national and international economies.  The European trends usually are more non-casual and fast changing.    The London Interbank Offering Rate is termed Libor.   It ossillates from 4 to 6 percent most of the time.   The COFI index is a nice slow moving trend adjuster.  The Cost of Funds Index is really small and conservative as its history trends will show you.  The COFI hovers between 2.5 and 4.5 and never leaps much at one time when it does move.   They float they are macoeconomically sensitive to the US economy and the International economies.  They will constitute the variable half of the ARM interest rate.  Whereas the "margin" constitutes the fixed half of the ARM interest rate on a home loan. 


     For REVIEW:   A new mortgage loan presented as an ARM with a marging  = 3.00 and floating on the COFI Index, with a rate cap of 9.00, and a 'teaser rate"  of  5.75% for the first 12-months of the loan, with no points needed to buy down the initial startrate; sounds like a pretty fair deal.  Doesn't it?


Happy Home Buying,
yours truly,
Cheryl A MillerEld
Web Content Editor/Blogmaster