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Adjustable Rate Mortgages - Determining Rates |
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Adjustable rate mortgages are to home buyers as carrots are to
bunnies - very tempting. The secret to figuring out if an
adjustable rate mortgage is a good deal is the rate index used.
Indexes - Setting Rates
Lenders really want your business and are willing to create
enticing loan products to get it. Occasionally, lenders will
offer adjustable rate mortgages that offer a lot of carrot on
the front end, but none on the back end. These loans are
typically offered to you with an insanely low initial interest
rate, which has you looking at mansions and other structures
completely out of your realistic price range. The problem with
these loans is the rate rises dramatically after six months or a
year when the rate becomes pegged to an index.
Indexes are a unique animal when it comes to the mortgage
industry. An index is a calculation of general interest rates
charged across a number of financial markets that a bank uses to
set a real interest rate on your loan. Common financial markets
or products considered in this index include six month
certificate deposit rates at local banks, LIBOR, T-Bills and so
on. Let's take a closer look.
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Certificate Deposits - Better known as "CDs", these are the
fixed time period investing vehicles you can get at your local
bank. You agree to deposit a certain amount for six months and
the bank gives you a guaranteed interest rate of return such as
three percent.
2. T-Bills - Officially known as Treasury Bills, T-Bills are the
credit cards for the federal government. Currently, Uncle Sam
owes trillions of dollars on his and pays a certain interest
rate on the debit. The interest rate is used by lenders in
calculating your ARM rates.
3. Cost of Funds Index - It gets a bit technical, but this index
represents the rates being used by banks in Nevada, Arizona and
California as an average.
4. LIBOR - Officially known as the London Interbank Offered Rate
Index, LIBOR is a popular index upon which to base ARM rates.
Now, you are probably wondering what London has to do with the
United States real estate market. LIBOR represents the interest
rate international banks charge to borrow U.S. dollars on the
London currency markets. LIBOR rates move quickly and can result
in unstable interest rate moves for your adjustable mortgage.
Why Indexes |
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Untitled Document
The financial institutions are expecting interest rates to rise. When and what's expected?
Interest Only mortgages have become increasingly popular. Why, and what are the concerns?
Mortgage lenders use headline interest rates to attract borrowers. But behind the scenes they're introducing a whole raft of add on charges. This article explains.
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