There are two basic types of mortgages. Fixed rate mortgages which have an interest rate that stays the same and adjustable rate mortgages , also known as ARMs, which have a fluctuating rate. There are variations on these two and there are even hybrid mortgages which combine a period of fixed rate followed by a (usually longer) period with an adjustable rate. However, most mortgages fall into one or the other main category.
Mortgage Calculators exist that can help borrowers figure out their mortgage payments under different kinds of mortgages. With ARMs there are several things borrowers need to understand.
The mortgage rate in an ARM is actually a formula rather than a stable rate. There are two components to this formula. The first is the schedule. This determines how often the interest rate is recalculated. In many cases this is done on an annual or quarterly basis, however there are some ARMs that are calculated monthly or on an irregular schedule. These terms are spelled out in the mortgage agreement.
The other important factor is the index used for calculating the rate. There are six indices that are in common use in the US. These include the London Interbank Offered Rate (LIBOR), the Treasury Average Index (MTA), the Cost of Funds Index (COFI), the National Average Contract Mortgage Rate, the Constant Maturity Treasury (CMT), and the Bank Bill Swap Rate (BBSW). These rates may be directly applied or may have a margin added to them to determine the final mortgage rate.
Each time these calculations are performed, the monthly payment on the ARM will change. Those who purchase an ARM are taking a risk that their loan index might rise dramatically, causing their mortgage payments to rise as well. Most ARMs address this potentially by including a cap on the charges, usually tied to the frequency of change, periodic change, or total change over the life of the loan.
No related posts.