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Adjustable Rate Mortgages

Unlike a fixed rate mortgage, the interest rate for an ARM changes

periodically, usually in relation to an index. Therefore, payments may

go up or down accordingly. Lenders generally charge lower initial

interest rates for ARMs than for fixed rate mortgages. This makes

 the ARM easier to afford at first than a fixed rate mortgage for the

same amount; also, you might qualify for a larger loan because

lenders often look at your current income and the first year's

payments. Your ARM could actually be less expensive over a long

period than a fixed-rate mortgage - for example, if interest rates

remain steady or fall.

However, you have to weigh the risk that climbing interest rates

would lead to higher monthly payments in the future. It's a

trade-off - you get a lower rate with an ARM in exchange for

assuming more risk. When considering whether to go with a fixed

rate mortgage or an ARM, ask yourself the following:

-    Is my income likely to rise enough to cover higher mortgage

    payments if interest rates go up?

-    Will I be taking on other sizable debts, such as a loan for a

    car or school tuition, in the near future?

-    How long do I plan to own this home? (If you plan to sell

   soon, rising interest rates may not pose the problem they

   do if you plan to own the house for a long time.)

-    Can my payments increase even if interest rates generally

    do not increase?

The Adjustment Period: The period between one rate change and

the next is called the adjustment period. With most ARMs the

interest rate will change every year, every three years, or every

five years. Some ARMs change more often. So, a loan with an

adjustment period of one year is called a one-year ARM, and the

interest rate can change once every year.

The Index: Most lenders tie ARM interest rate changes to changes

in an "index rate". These indexes usually go up and down with the

general movement of interest rates. If the index rate moves up so

does your mortgage rate in most circumstances, and you will

probably have to make higher monthly payments. On the other

hand, if the index rate goes down, your monthly payment may go

down. Lenders base ARM rates on a variety of indexes. Among

the most common are the rates on one-, three-, or five-year

Treasury Securities. Another common index is the national or

regional average cost of funds to savings and loan associations.

A few lenders use their own cost of funds, over which - unlike

other indexes - they have some control. You should ask what

index will be used and how often it changes. Lenders are required

by law to provide you with a historical example of the index

associated with the type of ARM you choose.

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Send mail to davidclark@whyusa-omaha.com with questions or 

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