Adjustable rate mortgages usually have two numbers associated with the loan offer, such as 1:1, 3:2 or 5:1. The first number specifies the number of years that the adjustable rate mortgage will operate like a fixed mortgage until it comes up for an interest rate review for the first time.
The second number specifies the interval of years which the mortgage will be reviewed for its interest rate after the initial review. For example, in a 5:1 adjustable rate mortgage, the mortgage would operate with a guaranteed fixed interest rate of x% until it is five years old, then it would go up for its first interest rate review. At that time, the interest rate would change to y%, and each year after that, for the life of the loan, the interest rate would be reviewed again.
When you go to apply for a mortgage, you will be given two options-a fixed rate mortgage or an adjustable rate mortgage. It is important that you do a good deal of research before you choose one or the other type of mortgage to ensure that you are doing what is best for your situation. Choosing an adjustable rate mortgage will depend largely on the current realty market in your area and your own financial situation.
Discuss your options with your bank or financial advisor before making any decisions on your home mortgage loan.
Getting a mortgage for your home means that there are many different possible options. An option ARM, or adjustable rate mortgage is one possibility available for financing your new home. This mortgage gives you flexibility in the way you meet your monthly payments. Here are some details that will enable you to know if this mortgage is the one you need to purchase your home.
The option ARM's outstanding feature is that it provides the borrower with four different ways to make the monthly payments. This gives you the ability to control the way you make the payments. When things get a little tight, you can change the payment you make during that time. The four payment options are as follows:
Minimum Payment Option
Once you have passed the low introductory payments with its special offer, you can expect that you will start paying the interest rate you received for the first year. The first year of an option ARM allows you to make a minimum payment each month. This can have an interest rate between 1 to 4%. Some option ARM's may even permit you to skip a payment altogether - remember, though, it gets added in somewhere.
It is important to note that if the amount of your payment does not cover the interest for those months, it does become added to the principal amount you owe.
The following year, however, the interest rate will climb to more normal market conditions, with a max cap of a 7.5% increase.
Interest Only Option
Another way that you can pay on an option ARM is to choose the interest only option. This allows you to pay the interest only each month. Notice, however, that interest only payments do not reduce your principal. You can expect that the payment size will change monthly based on current market interest rates.
30 Year Fully Amortized Option
This option allows you to make standard payments which will fully amortize the loan at the end of 30 years. The payment is calculated each month according to the interest rate at the time.
15 Year Fully Amortized Option
This mortgage is based on a 30 year calculation. You are making payments, though, so that it can become fully amortized in just 15 years. You do have the larger payments to make, but will save a lot of money by reducing the payment period.
It is very important, especially with the first option that you watch out for negative amortization. While some lenders actually use this term to name their product - it usually is not a good thing. You can find that your payments get raised very high (unusually so) in order to bring your payments into a fully amortizing status. In some cases, the caps may not apply because there is a possible resetting of loan terms when negative amortization occurs over a period of time.
Just like with any mortgage purchase you make, you should shop around in order to find the best deals. This will mean getting several quotes and comparing the various fees, interest rates, and terms. You will also want to know exactly what the margins are, too.
Both Ken Charnley & Joseph Kenny are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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