Understanding ARMs

When securing a mortgage, one of your primary concerns should be what interest rate you’ll pay. Rates will often depend on the market conditions at the time you buy your home. If you want to avoid the stress that comes with following the rise and fall of interest rates, then you may want to play it safe and simply go with a fixed-rate mortgage. However, the peace-of-mind that comes with fixed rate loans may end up costing you more in interest over the life of your loan.

How Variable Rates are Determined

On the other hand, if you’re willing to take a gamble on interest rates falling the future, then you should give serious consideration to an adjustable-rate mortgage. Such a loan can secure you a lower initial rate right now, and then keep saving you money if rates happen to go down in the future. While interest rates may seem like such a volatile, unpredictable concept, the rate you end up paying with an ARM isn’t all that difficult to understand. It’s determined by combining the current market index (which is variable) with your preferred lenders margins (which are fixed). Index rates are maintained by third parties such as the London Inter-Bank Offer Rate (LIBOR) or the U.S. Treasury Bill (T-Bill) and can easily be found online or in financial publications.

Types of ARMs                                                                         

There are also different types of ARMs to choose from, each designed to help you manage your rate in a different way. These include:

  • 1-yr Treasury ARMs: The rates on these loans begin to adjust after your first year.
  • Convertible ARMs: A convertible ARM can be changed to fixed-rate loan after a certain period of time (essentially a less-expensive alternative to refinancing).
  • Intermediate ARMs: Often called hybrid ARMs, these loans follow a set schedule where your rate will be fixed before being adjusted annually. For example, your rate remains fixed for seven years with a 7/1 loan, then adjust annually every year thereafter.

In the end, there is always going to be an inherent risk that comes with ARMs. Just because the risk is there doesn’t that mean that it can’t be properly managed. If you have a trusted, reliable mortgage broker to help guide you in your decision-making, an ARM can help secure the home of your dreams while saving tens of thousands in interest. Let Altius Mortgage Group help you secure such services.

Tips for Figuring Out How Much Home You Can Afford

When you’re ready to purchase a home, it’s important to have an idea of exactly how much you can afford before you start shopping. Without any idea of your monthly budget it’s much more difficult to narrow your home search, and you could wind up getting in over your head if you purchase a house that is way out of your price range. Here are some quick tips for calculating the right size mortgage so you can get the best home for the budget you have available.

Calculate Net Income

Banks base lending on your gross income, but it’s more realistic to look at your net income after taxes—the amount you actually get in your paycheck. This will give you an accurate picture of exactly how much money you have to spend each month on everything you need, from a house payment to entertainment, gas, and groceries.

Create a Realistic Budget

Next, sit down and write down all of your recurring monthly expenses, including:

  • Utility bills
  • Credit card or student loan debt
  • Car payments
  • Health and other insurance
  • Groceries
  • Eating out
  • Entertainment
  • Shopping

It may help to list these expenses in three categories: essential expenses that you have to pay (like your electric bill), optional expenses (like shopping for new clothes), and essential but flexible expenses (like a grocery bill that you could adjust based on your income and expenses). You may also want to make a separate list of new expenses you will incur as a homeowner, such as homeowners association (HOA) fees, landscaping costs, property taxes, and homeowners insurance.

Identify Available Income for a House Payment

Now that you know your monthly income and your expenses, it’s time to calculate how much of that is left over and available for a house payment. If living in a nicer home is important to you, look at ways you can cut down on optional expenses or modify your lifestyle to put more toward your home. It’s always a good idea to leave some wiggle room in the budget for emergencies, savings, and retirement so if or when these things come up you won’t be in financial trouble.

Use a Mortgage Calculator to Calculate Home Costs

Now that you know how much you can spend on a monthly mortgage payment, hop online and find a mortgage calculator that will tell you what price home you can afford. You’ll need to know your approximate credit score so you can get a relatively accurate estimate of what your interest rates will be. Keep in mind that interest rates can fluctuate, so you should calculate a payment you can afford based on today’s interest rates, as well as 0.5 percent to 1 percent higher, just in case they change.

Talk to Altius Mortgage today to find out more about calculating how much home you can afford, and to find out about current interest rates and mortgage trends.