The Factors That Change ARM Rates

adjustable rate mortgage

For certain people, adjustable-rate mortgages are the preferred loan format. This is a format where mortgage rates can change through the life of the loan, and the number you’re repaying to mortgage lenders may change.

For people who stand to potentially benefit from the benefits of these kinds of loans (lower starting rates and requirements in many cases, for one), knowing which factors influence the adjustable mortgage rates in these loans is vital. Courtesy of Altius Mortgage and our partners at Mortgage Ogden, here are the basics on how changing mortgage rates are influenced.

Index

Also called reference rate, this is the average rate at which a given financial institution borrows unsecured funds. The index is the largest factor behind changes in interest rates for ARM loans. Different mortgages use different indexes – in the United States, these are the most common:

  • COFI: Short for 11th District Cost of Funds Index, this is based on reports from qualified member banks of the Federal Home Loan Bank of San Francisco. It’s updated once a month.
  • LIBOR: Short for London Interbank Offered Rate, this is updated daily and is used most commonly by private lenders.
  • MTA: This represents 120-month Treasury Average Index, and is based on a 12-month average of yields of securities issued by the US Treasury. This index is calculated monthly, and is considered very stable.
  • CMT: Or Constant Maturity Treasury, this is also based on the US Treasury yield, though it has to do with maturity dates on securities. CMT is more volatile than many others.
  • National Average Contract Mortgage Rate: An index based on the rates homebuyers paid if they bought within five working days of the end of the month. This is the traditional, most common index for ARM loans.

Index Caps

Because sharp rises could put people in a huge financial bind, index caps were created. These cap how much interest can change, either for the life of the loan or within a certain specific period. However, be aware that index caps only apply for interest – extra money above the cap is redistributed toward the balance, and can lead to higher monthly payments.

Margin

This is a fixed number that’s settled on before the loan. It’s not adjusted during the loan, so it lends some stability.

Discounts

In some cases, you can receive a discount for a year or two on your ARM. Speak to your broker about whether this is possible in your situation.

Want to learn more about mortgages, or any of our services? Speak to one of our mortgage brokers at Altius Mortgage today.

5 Financing Options for Your Next Home Loan

When people talk about getting a home loan it might sound pretty straightforward, but the truth is that there is more than one type of loan that you can get. Getting the right one can ensure that you are able to afford your monthly payments, your interest rates are as low as possible, and you can get the most home for your money based on the down payment you have available. Here are five options to talk to your mortgage lender about when you’re ready to get a loan.

Fixed-Rate Mortgage

The fixed-rate mortgage, which may also be called a “traditional” mortgage, is designed for homeowners with great credit, at least 10 percent to put as a down payment, and who plan to stay in their home for an extended period of time. This loan will have a fixed rate and fixed monthly payments for the life of the loan, and will generally range from 10 to 30 years. It’s a great option if you have excellent credit and interest rates are low.

Adjustable-Rate Mortgage

An ARM, or adjustable-rate mortgage, will have a low introductory rate for a fixed number of years, then the rate will fluctuate based on the market rates at the time. These type of loans are not necessarily bad, but are not the best option in every situation. For homeowners that plan to only be in the house for a short period of time (usually less than 5 years), getting the lower rate up front can keep payments low and allow you to sell before your rates change. It’s also a potential option if you believe that rates will go down in the future—in which case your payments will go down.

Interest-Only Loans

Most loan payments are structured with a portion going toward interest and another portion toward the principal balance. Interest-only loans have lower monthly payments because the homeowner is only responsible to pay the interest, with nothing paid toward principal. These are certainly not as common as they were a decade ago, but might still be an option for a short-term loan. Since you’re not paying down the balance of your original loan it’s not a feasible long-term option, and buyers will eventually have to refinance, pay off the balance with a lump sum, or increase their payments to begin paying down principal.

Reverse Mortgages

The reverse mortgage is only available for homeowners over 62 who want to turn the equity in their home into income. They have their own risks and obligations, and should be carefully considered and fully understood before any homeowner decides to get one. A mortgage lender can help explain the process and provide you with all the details.

Buydown Mortgage

As you pay down the total principal of your loan, your total interest paid over the life of the loan will go down. These mortgages allow you to pay a lump sum or a fee that buys down the amount of interest you will pay on the loan.

To learn about all the options available and figure out which is best for you, talk to a mortgage lender in Utah today.

4 Mortgage Terms Every Future Homeowner Should Know

For many first-time homebuyers, the process of navigating through a home loan can seem a lot like learning a foreign language. Before you dive in to that new mortgage, though, it’s important that you understand exactly what your lender and real estate agent are talking about when they use industry jargon. Here are a few critical terms to learn.

Prequalified or Preapproved

Before you begin house hunting, you should swing by your lender’s office and talk to them about getting prequalified or preapproved for a loan. Prequalification is a simple process that will give you an estimate of how much you might be able to qualify for based on the information you provide to the lender. Preapproval is the next step, and can help you figure out exactly what you can borrow and prepare you to put down an offer after you get a credit check and determine exactly how much of a loan you will be able to get.

Conventional Loans

The traditional home loan requires that you put between 5 and 20 percent of the purchase price down, and finance it with a fixed rate for 15 or 30 years. If you have bad credit or a short credit history, you might not qualify for these conventional loans. That doesn’t mean you can’t purchase a home, it just means you will need to talk to your lender about what options are available for you.

Fixed or Variable Interest Loans

The interest rate on your mortgage determines your monthly payments. On fixed-rate loans you will have a single interest rate that is locked in at today’s market rates that will remain on your loan for the duration that you have it. A variable interest rate often starts out lower, then may increase in the future if interest rates in the market go up. Talk to your mortgage loan company about what this might mean for you and your payments to make sure you get a loan you will be able to pay in the future.

Mortgage Insurance or PMI

Gone are the days when you could get a home loan for little or no down payment at a very low interest rate—those terms for loans disappeared in the housing bubble crash of 2008. Today the banks and lenders generally require that you have at least 20 percent equity in your home, and if you don’t (for example if you put down 5 percent), you will pay private mortgage insurance (PMI). Once you pay down your loan, or if your home increases in value over time, you can petition your lender to get this cost removed.

You might also be confused about the process of closing your loan, which involves things like closing costs, potentially paying “points”, and how escrow works. If that is the case, talk to the loan specialists at Altius Mortgage to learn more today so you can confidently go into your next home purchase.

Comparing Adjustable and Fixed Rate Mortgage

When you are preparing to purchase a new home, one of the decisions you need to make is whether you are going to get a fixed-rate or an adjustable-rate mortgage. The two types of mortgages have some pretty significant differences, and choosing the one that is right for your situation will impact you throughout the life of your loan. Here are some important tips for comparing these two products.

Fixed-Rate Mortgages

After the housing market crash of the late-2000s you heard many people discussing the value of a fixed-rate mortgage. Many homebuyers prefer these types of mortgages to adjustable rates since they offer stability in payments from the time you purchase your home until the time you sell, regardless of what happens in the markets. The predictability of these loans means you are not watching the ever-changing market interest rates and wondering what your monthly mortgage payments will look like next month or next year.

Shopping around, comparing loans, and calculating your monthly payment are all pretty straightforward with a fixed-rate mortgage, and you won’t need to do any math or make any predictions about changes to interest rates for the near future, which is enough to make most homebuyers choose this option. These mortgages are often a better choice for someone who is planning to remain in their home for the long term (more than five years), or if there is a pretty good indication that mortgage rates could rise significantly in the near future.

Adjustable-Rate Mortgages (ARM)

One of the main disadvantages of a fixed-rate mortgage is if you are unlucky enough to lock in your rate at a time when interest rates are higher. If you buy today at a rate of 4.5%, but rates continue to drop over the next year to 3.5%, this lower rate could make a significant difference in your monthly payments. With an adjustable rate mortgage, commonly called an ARM, you will be able to take advantage of falling interest rates and can get a better monthly payment out of it.

ARMs also generally have lower initial interest rates, which can save you money if you are not planning to stay in your house for very long—for example, if you plan to flip the home or you are only temporarily living in an area for a job. However, if things change and you end up staying in your home longer than you thought, and/or interest rates rise significantly over the time you have your loan, you could see your monthly mortgage payments go up.

Deciding Which Loan to Get

Your best option will depend a lot on your personal financial situation and your plans for the home. Before making any decisions, sit down with an experience loan advisor from Altius Mortgage to discuss your options and make sure you clearly understand each type of loan.