Homeowners/Investors: Is It Time? The ABC's of an Adjustable-Rate MortgageSeverino Financial
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Homeowners/Investors: Is It Time? The ABC’s of an Adjustable-Rate Mortgage

adjustable rate mortgage

One question governs the minds of homeowners and investors alike: “When and how often does my interest rate change?” This can be answered by determining the date and frequency of your payment adjustment for your adjustable-rate mortgage. Most loans limit the interest rate increase to just one or two percent per year and have the life of loan cap around twelve percent or more. So, ask yourself, “Is it time?”

Learn about the ABC’s of an adjustable rate mortgage to get your answer.

A. Starting Interest Rate

This serves as the introductory rate of your adjustable rate loan and is usually below the prevailing interest rates. The starting interest rate remains constant for six months up to 10 years.

B. Interest Rate Caps

Your financial transaction has a maximum permissible level, and it is called the interest rate cap or ‘ceiling.’ Its periodic coverage could be monthly, semi-annually, annually, or life of loan.

C. Cost of Funds

The cost of funds has two parts. The first is the index, which is the cost of money to the lender. Margin, on the other hand, represents the cost associated with servicing the loan and profit to the lender. In conclusion, the interest rate you pay is determined by adding the index to the margin.

You might be wondering by now where you can possibly get all this information. The answer lies within the original loan documents that you signed at escrow closing. You could base your decision on the adjustable-rate note and the adjustable-rate rider.

Moreover, you may have noticed your payment increase in the past year or so, but in a way too subtle for you to see right away. Look at the graphs below and see how most short-term rates grow up to 250%+ over thirty-six months.

The truth is, we are in an economic climate where, just recently, the three-month treasury had a higher yield than the ten-year treasury. It might be a signal that the US is headed into a recession. By their nature, adjustable-rate loans create uncertainty about the number of future mortgage payments, while a fixed-rate loan provides security.

Short-term rates are continually rising, and long-term rates maintain a flat. This may be an excellent time to consider refinancing into a fixed-rate loan. If you learn more, you can save more. Call us at 760-598-9366, and Mike at Severino Financial will discuss your fixed-rate refinancing options.