Adjustable Rate Mortgages

Unlike fixed rate mortgages, variable or adjustable rate loans have an interest rate that fluctuates over the period of the NH loan and therefore monthly payments fluctuate also. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time you apply for the loan.

• 11 th District Cost of Funds Index (COFI)
• 12-Month Treasury Average (MTA)
• Certificate of Deposit Index (CODI)
• Constant Maturity Treasury (CMT)
• Cost of Savings Index (COSI)
• Fannie Mae's Required Net Yield (RNY)
• London Inter Bank Offering Rates (LIBOR)
• Prime Rate
• Treasury Bill (T-Bill)

Your new interest rate is equal to the index plus a margin. The margin is fixed percentage points added to the index to compute the interest rate. The result will then be rounded to the nearest one-eighth of a percent. The margins remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates. Lenders use a variety of margins depending upon the loan program and adjustment periods.

Most ARMs have an interest rate cap to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at each adjustment (for example if your rate changes annually).

With most ARMs, the interest rate can adjust every six months, once a year, every three years, or every five years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on. All ARMs are available with 30-year terms and some with 15-year terms.

Adjustable rate mortgages generally have a lower initial interest rate than fixed rate loans, and most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the NH loan, which could be one month or a year or more.

Intermediate Fixed Rate Mortgages, or Short-Term Fixed Rates

There is a 3-Year Fixed, a 5-Year Fixed, a 7-Year Fixed and a 10-Year Fixed. (These are not be confused with the 15-Year Fixed Rate Mortgage that has you paying the loan off in a much more rapid manner.)

In the case of the 3-Year Fixed, these loans are amortized over 30 years, so you have a loan that is Fixed for the first 3 years, and it becomes an Adjustable Mortgage for the remaining 27 years of the 30 year cycle.

In the case of the 5-Year Fixed, it is fixed for 5 years and becomes an Adjustable for the remaining 25 years, as with the 7-Year Fixed, which is fixed for 7 and Adjustable for the remaining 23 years. Likewise, the10-Year Fixed is fixed for the first 10 years, and is an Adjustable for the remaining 20 years.

The longer that you are fixed for, of course, the more stability you are buying and therefore the higher the interest rate. You can get yourself a fairly aggressive fixed rate on a 3- or a 5-Year Fixed these days. As a matter of fact, these types of programs have been very beneficial to people who we know are not going to be in their loan for a long period of time.

Once again, let's get back to that important question, 'How long will you need to borrow the money for?' If we think rates are likely to be lower sometime in the next 3 to 5 years, or you are going to be moving in the next 3 to 5 years, these types of loans could be very effective in accomplishing the objective in the stability of a Fixed Rate but at a very low level. Who cares if the loan converts to an Adjustable, if you are not in it to see that occur.

It is not advisable to get into paying a lot of points on these types of loans. If you are going to take a loan out on a 3-Year Fixed, then you are doing that because you don't think you are going to be in it for a long period of time. The likelihood of your recuperating the cost of those points is significantly diminished as a result of short tenure in the loan.

• Strengths: This program provides the lowest rate for the first year out of the available programs.
• Weaknesses:This is a risky program for the long term considering the rate can increase by as much as 6%.
• Comments: This is a great program for those who are going to be in a home for three years or less, those who plan on making more money over the next few years and those looking to refinance within the next three years. This is not a good program if you think rates are going to increase over the next few years.

Note: 30 year amortization. Rate adjusts every year based on 1 year treasury plus a margin. Caps are 2% per year and 6% for the life of the loan.

• Strengths: This program offers the l owest qualifying rate of all loans and allows the borrower to qualify for the largest loan. This is a good combination of fixed rate security and low starting rate.
• Weaknesses:Three years fixed may not be enough security for some who are cautious borrowers.
• Comments: This is a great program for Non Conventional Jumbo loans and for those who plan on being in a home for 3 to 5 years. This is also a good program for anyone who believes that rates will be lower at some point in the next five years.
  

Note: 30 year amortization. Rate is fixed for three years then adjusts each year based on the 1 year treasury plus a margin. Caps are 2% per year and 6% for the life of the NH loan.

• Strengths: The five year lock in period on this program offers as much security as most borrowers use (The national average life span of a loan is 4.7 years) and at a noticeable savings over the 30 year fixed. The 5/1 program usually has a lower par rate (a rate with 0 points) than the 5/25 Balloon and a better rate after the 5th year of the loan.
• Weaknesses: Five years fixed may not be enough security for some who are cautious borrowers.
• Comments: This is a great program for borrowers (Jumbo especially) who want the added security of a longer fixed rate term but still want to save money over a 30 year period.
  

Note: 30 Year Amortization. Rate is fixed for five years then adjusts each year based on the 1 year treasury plus a margin. Caps are 2% per year and 6% for the life of the loan.

• Strengths: At times this program has a lower rate than the 30 Year fixed.
• Weaknesses: The spread between the 30 year fixed and 7/1ARM is usually not that dramatic.
• Comments: This may be right for you if you plan on being in your loan for seven years or less, want a low rate, and are insistent on an ARM.
  

Note: 30 Year Amortization. Rate is fixed for seven years then adjusts each year based on the 1 year treasury plus a margin.

• Strengths: This program has a low rate with 5 year fixed rate security. This is a great program for the borrower planning on paying off the loan or relocating in five years or less. This program can have extremely low rates with modest point buy-down.
• Weaknesses: Five years fixed may not be enough security for some who are cautious borrowers.
• Comments: This is a great program for borrowers (Jumbo especially) who want the added security of a longer fixed rate term but still want to save money over a 30 year period.
  

Note: 30 Year Amortization. Rate is fixed for five years then adjusts one time based on the 60 day FNMA bond rate plus a margin.

Negatively Amortizing Loans

Some types of ARMs offer payment caps rather than interest rate caps, which limit the amount the monthly payments can increase. If a loan has a payment cap but has no periodic interest rate cap, then the loan may become negatively amortized. However, you always have the option to pay the minimum monthly payment, or the fully amortized amount due.

• Strengths: You can control cash flow (relatively stable payment), take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now (because of natural inflation).
• Weaknesses: If the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance, so the loan balance increases. If not careful with this type of loan, you could end up owing more for your home than your home is worth and become upside-down in the NH loan.
• Comments: This is a great tool for homeowners as long as you understand the mechanics of what's going on.
  

more information

Option ARM Loans

This is a highly creative product that does not require a set payment each month. After the first payment, you get four payment options to choose from each month: your lender sends you a monthly statement offering a minimum payment (1), interest-only payment (2), 30-year amortized payment (3) or 15-year amortized payment (4).

• Strengths: This is the most flexible program available because it offers so many payment options, and also allows you the most control over your loan.
• Weaknesses: If you always choose the minimum payment and the rates rise, you run the risk of the loan becoming negatively amortized.
• Comments: This product is great for someone whose income fluctuates monthly or whose income will increase, because you are offered choices in your payment each month.

more information