Important And Useful Facts To Know About Variable Rate Home Loans |
Posted: March 17, 2016 |
Purchasing a home can be one of the most daunting financial decisions that you can ever make. Not only would you require choosing the right property that fits your lifestyle and needs but you would also need to select the best mortgage among the various options that are there in the market. If you have been studying on the different types of mortgages, you should know that mortgages are of 2 types, adjustable and fixed rate. While most prospective homeowners think that variable rate home loans or ARMs are better than their fixed counterparts, it is not always true. Even the fixed rate mortgages have different benefits that need to be discussed. Nevertheless, the concerns of this article will tell you about the important facts that you should know about variable rate home loans. Check them out. 1. The index of ARMs: You must be wondering about the reason behind the fluctuation of ARM interest rates. The ARMs are usually linked to a common index which is either the Monthly Treasury Average or the London InterBank Offered Rate (LIBOR). If there is an increase in the index, the interest rate will increase too and this will mean a rise in the monthly payments that you make on the loan. Similarly, if the index drops, the mortgage rates will also drop. 2. The Margin of ARMs: What is the margin? It is a pre-set number of percentage points which the lender adds on to the index rate. There are some lenders which base the total margin amount which they charge on ARM on your credit. Remember that when you come with a better credit score, the lower will be the margin and the lesser will be the amount that you have to pay on the mortgage loan. So, when you compare ARMs, look at the index and the margin percentages. 3. Initial introductory rate: When you take out an ARM, you will get a rebated interest rate for a certain period of time which is known as the introductory period. This period could last from 1 month to 5 years. You shouldn’t get lured by this rate as the interest rates may suddenly increase when the introductory period ends. You could be in for an ultimate shock if you had entirely relied on the initial rates. 4. Negative amortization: When you don’t cover the total amount of interest rate owed each month, you start falling into a precarious situation which is known as negative amortization. This is a state when your unpaid interest rate starts adding to your mortgage balance. Instead of paying down the loan balance, you end up owing much more than what you actually borrowed. Lenders, like Newcastle Permanent Building Society, wouldadvise you to know the facts mentioned above as being informed is better than staying ignorant. If you wish to opt for information on variable rate home loan savings, you should seek help of either a mortgage agent or research online.
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