interest rate

Adjustable Rate Home Loans

An adjustable rate mortgage, sometimes referred as an ARM, is a mortgage loan where the interest rate on the note is adjusted based on a variety of indices.

The most important basic features of ARMs are:

1. Initial interest rate. This is the beginning interest rate on an ARM.

2. The adjustment period. This is the length of time that the interest rate or loan period on an ARM is scheduled to remain unchanged. The rate is reset at the end of this period, and the monthly loan payment is recalculated.

3. The index rate. Most lenders tie ARM interest rates changes to changes in an index rate. Lenders base ARM rates on a variety of indices, the most common being rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations.

4. The margin. This is the percentage points that lenders add to the index rate to determine the ARM’s interest rate.

5. Interest rate caps. These are the limits on how much the interest rate or the monthly payment can be changed at the end of each adjustment period or over the life of the loan.

6. Initial discounts. These are interest rate concessions, often used as promotional aids, offered the first year or more of a loan. They reduce the interest rate below the prevailing rate (the index plus the margin).

7. Negative amortization. This means the mortgage balance is increasing. This occurs whenever the monthly mortgage payments are not large enough to pay all the interest due on the mortgage. This may be caused by the payment cap contained in the ARM when are high enough that the principal plus interest payment is greater than the payment cap.

8. Conversion. The agreement with the lender may have a clause that allows the buyer to convert the ARM to a fixed-rate mortgage at designated times.

9. Prepayment. Some agreements may require the buyer to pay special fees or penalties if the ARM is paid off early. Prepayment terms are sometimes negotiable.

interest rate

What Are My Mortgage Rights?

You should know your rights as mortgage borrower.  A mortgage will probably be the most important loan your entire life.  Understand your rights as a borrower before entering into a loan agreement with a lender.

• You have the RIGHT to shop for the best loan for you and compare the charges of different mortgage brokers and lenders.
• You have the RIGHT to be informed about the total cost of your loan including the interest rate, points and other fees.
• You have the RIGHT to ask for a Good Faith Estimate of all loan and settlement charges before you agree to the loan and pay any fees.
• You have the RIGHT to know what fees are not refundable if you decide to cancel the loan agreement.
• You have the RIGHT to ask your mortgage broker to explain exactly what the mortgage broker will do for you.
• You have the RIGHT to know how much the mortgage broker is getting paid by you and the lender for your loan.
• You have the RIGHT to ask questions about charges and loan terms that you do not understand.
• You have the RIGHT to a credit decision that is not based on your race, color, religion, national origin, sex, marital status, age, or whether any income is from public assistance.
• You have the RIGHT to know the reason if your loan was turned down.
• You have the RIGHT to ask for the HUD settlement costs booklet “Buying Your Home.”

« Previous Page