Knowing If Adjustable Mortgage Rate Is Right For Me!

My wife and I decided to take out a second mortgage on our house for a remodeling project. We were advised to operate under a home equity line of credit for various reasons. Our credit was poor while our mortgage had been up to speed. We shopped around for a while for lenders, finding un-affordable fixed interest rates. Looking for alternatives, we found the adjustable rate mortgage option. We looked for further help from Real Estate Yogi, finding a representative who informed us found a lender with the adjustable mortgage rate option.

Comparing Mortgage Options

The fixed mortgage rates today were had high rates that we couldn’t afford at the time. My new employer brought me in at entry level. I expected that this would soon change. My initial salary was too low for the low interest rates, but most would be affordable with eventual income increases. I was steered towards the adjustable rate home mortgage option because of the affordable “teaser” or initial interest rates.

Why We Chose the Adjustable Option

The ARM would remain low for a period of time (called the initial interest rate period) based on the lender and loan choice. After that, at a time concurrent with future earnings, a new interest rate would be calculated based on a margin added to the index to determine the interest rate. The interest rate is adjusted according to the compiled index. The Real Estate Yogi Representative laid out the options based on the different components of the ARM and different interest rate terms.

Adjustable Rate Mortgage Options

The representative said that margins vary, meaning that the new interest rate after the initial interest period would be calculated differently from lender to lender. They explained to us that these are measured based on different international indexes and standards that indicate market standings. Two of these include the Constant Maturity Treasury index, or a maturity (adjusted by the rate of a year) of the average yield treasury securities, and the one year London Interbank Offered Rate. Different options have different rate cap structures that limit rate increases.

The different caps offered are annual, and life of the loan. The annual option limits how much the rate can change per year, while the lifelong limits the interest rate to one value over the period of the mortgage.  

We boiled our choices down to two hybrid interest cap rate structures, the interest cap dependent on the initial interest period. The longer the initial interest rate period, the higher the cap component. The short term initial interest period, one and three years, were one percentage point for annual, and 5 points for the lifelong cap. The 5-10 year ARM would rise two points annually and six points over the life time. We could afford the 5% initial interest rate, and assumed that my first raise would be in 5 years, so we chose the 5 year option, with a two percent annually cap. There was the chance that we would abandon the mortgage sometime after my raise, and that having the 6 percent cap wouldn’t do any good because we might opt out before three years, when that would be equaled by the annual rate.

www.real-estate-yogi.com will help you like they helped my family, determining the ideal mortgage. They are a popular consumer service specializing in real estate and finance issues, from mortgages to foreclosures. Call 1-800-987-1397 for a free consultation.