An
adjustable rate mortgage
(ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices. Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). This is not to be confused with the graduated payment mortgage, which offers changing payment amounts but a fixed interest rate. Other forms of mortgage loan include the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and the balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest rates rise.
Adjustable rate mortgages are characterized by their index and limitations on charges (caps). In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.
Jake
asked:
"I've been expecting 30 year mortgage interest rates to be increasing because of increased risk. I figure investors would want a risk premium for the risk of not being paid, and the risk that the value of the dollar will decline. Why would an investor want to invest in real estate mortgages right now? Therefore rates would have to rise in order to provide incentive.So what's going on with the 30 year mortgages? Are there any good website to explain what's going on?"
Question posted courtesy of:
yoink012 replied:
"Rates are not increasing, recently they have decreased due to the US government taking control of Fannie May and Freddie Mac. This removed much uncertainty from the market because government backed securities are through to be "risk free". You can follow the 30 year rate at the following site: "
Shannon G replied:
"Whatever you do, don't listen to Bankrate.com. They are a shill for the mortgage industry and ALWAYS spin it so it's a good time to buy right now. They lie so routinely that they don't even know they are doing it, or at least they are believing their own crapola. Truth be told, it's hard to find a reputable site online. Just read the news on Yahoo and Google and BusinessWeek (imo the best) and make up your own mind. Motley Fool has some good stuff from the outside looking in."
precious
asked:
"My bf, who has an ARM mortgage, says that interest rates are going to go back into the double digits as they were back in the 1980s... I've never heard of this! I'm in the process of obtaining a mortgage of my own, so this has me petrified."
Question posted courtesy of:
Judy replied:
"Well, an ARM can easily go into double digits. Wait to buy until you can qualify for a conventional loan."
loopy_markvan replied:
"Avoid ARM loans like the plague. The interest rate is only going to go up right now, and these loans are one of the primary reasons for the mortgage crisis going on right now. So many people got suckered into these loans and bought houses they really could not afford. Now that the rates are going up, they can't afford the payments, and no one is buying houses right now. I can't tell you when the rates will hit double digits. All I can tell you is that you don't want this type of mortgage. Get a traditional fixed rate loan and you won't be affected by the rising rates. Once you lock in your rate on a fixed rate loan, that's the rate you pay for the life of the mortgage. It may be higher than what an ARM starts at, but at least you know that's the most you're going to pay."
Ed Atun replied:
"The fine print of all ARM's say that the rate could go to 12%. No one expected the realty boom of 2004. No one predicted the realty bust of 2008. No one can predict interest rates. But if you only live there for 4 years, it doesn't matter anyway.."
Nathan T
asked:
"What I mean by that is I assume there is a formula which banks use to figure out what mortgage rates to offer a customer based on prime rates, customers credit history, size of mortgage, etc...Does anyone know how this process works and the specific formula/methodology used?thanks in advance!"
Question posted courtesy of:
HuaracheKid replied:
"In general, mortgage rates are determined by the bond market, the 10 yr. treasury to be specific. Different lenders use different formulas - there isn't one magical formula that all lenders use. Also, it depends if the lender plans to keep the note or sell it to another investor. If it is sold, the lender has to follow the buyer's guidelines and doesn't have as much flexibility with determining interest rates.The rate depends on the type of loan too. Rates for 1st mortgages are different from 2nd mortgages and equity lines. Again, different lenders use different formulas."
Rush is a band replied:
"You hit a lot of key ones, but there are a few more.Credit history, prime rate, size of the loan, DEBT-TO-INCOME ratio, Loan-to-value ratio, etc.No bank would publish this info. It is part of their competitive advantage...good luck!"
Dale H replied:
"Rates are determined by investors in the secondary market.Most loans are originated for sale to Fannie and Freddie so they rates that anyone can offer depends on what Fannie and Freddie can afford to offer on a program (e.g. 30 year, 15 year, etc.) which in turn is driven by what their investors require for a return/yield on their money.The link below tells you what Fannies investors are requiring roughly.Then the Fannie/Freddie have to add a spread to that in order to make any money. The link below would represent a "par" rate based on delivery dates for various Freddie programs:Then, a lender either has to charge fees or offer a slightly higher rate in order to make any money.Today, we were offering 6.875% with closing costs of $350 in our market.Of course this conversation does not address the delievery fees required by the agency programs based on credit scores, loan to value, transaction type and occupancy. These delivery fees will add to the closing costs or increase the rate or both if the delivery fees cannot be covered by increasing the rate.Home equity and portfolio programs are priced by individual banks and there is no single methodology or formula. If they are lending there own money, they can price there programs how ever they like.There is a similar secondary market for government programs, Ginniemae, which operates a lot the same as the secondary market created by Fannie and Freddie. The big difference is that these are owner occupied programs and there are not as many delivery fees as with the Fannie and Freddie programs.I hope I have helped to illuminate the subject without over complicating things."
Adam
asked:
"I'm debating to lock in my mortgage today with not so great rates that closed on Friday. Today had a huge stock market rally, do you think the mortgage rates will drop tomorrow?What I'm debating is should I lock in rates today or wait until tomorrow because of this rally? I know morgage rates are tied to bonds."
Question posted courtesy of:
Tommy M replied:
"Yesss"
Hank replied:
"No. Mortgage interest rates are not tied or related to how the stock market does on any one specific day. Mortgage interest rates are set using other base interest rates such as the LIBOR rate, etc."
aguy
asked:
"Does anyone know how long it takes before we will see the 3/4 and 1/2 point rate cut reflected in the mortgage interest rates?Thanks"
Question posted courtesy of:
jon b replied:
"Conventional mortgage rates are long term debt instruments and the Fed Funds rate is for short term debt instruments - therefore they don't necessarily go hand in hand. Mortgage rates are based more on the 10 year treasury yield and the perceived rates of inflation. 10 year was up a touch today. If you are looking at things like Home Equity Lines of Credit, car loans, credit card rates - those usually have in the contracts a reset at a certain time of the month and will likely be reflected in the next full billing cycle."
moonbeam_2000g replied:
"It could take a month or two before you see the impact of the drastic rate cuts that the fed has made in the past 9 days. Mortgage interest rates are not tied to the fed funds rate, so the impact is not felt immediately. But, we should see rates decline to around 4 percent over the next 12 months. With housing prices dropping as well, it is a good time to buy a home."
Find out your monthly loan payment amount and loan amortization chart, total interest you will pay and the annual flat rate of interest.
The Federal government announced a new program to help homeowners in trouble with mortgage payments. If hardship is proved then one of three options-reduction in interest rate, stretching out of the loan, or conversion of interest into a delayed payment while paying the principle might be offered.
You lusted after housing didn't you? You really didn't need that five-bedroom 3,000-square-foot corner lot, but you just had to have it because your lender threw you all the money you wanted. How's that mortgage interest rate reset doing? Feeling a little squeezed? Lust turned to dust? There's a cure for what ails you.
If your mortgage payment is more than 40% of your income then Citigroup is now offering to provide support in reducing your mortgage payments. Citigroup will start calling mortgage holders in the areas having the greatest economic impact. Citigroup may lower your interest rate or extend your amortization to help reduce your mortgage payments.
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