Adjustable rate mortgage
An adjustable rate mortgage or variable rate mortgage is a loan secured
on a property (house) whose interest rate and so monthly repayment vary
over time. Other forms of mortgage loan include interest only mortgage,
fixed rate mortgage, Negative amortization mortgage, discounted rate
mortgage and balloon payment mortgage. Adjustable rates transfer part
of the interest rate risk from the lender to the borrower. They can
be used where unpredictable interest rates make fixed rate loans difficult
to obtain. The borrower benefits if the interest rate falls and loses
out if interest rates rise.
Variable rate mortgages are the most common form of loan for house purchase
in the United Kingdom but are unpopular in some other countries. Variable
rate mortgages are very common in Australia and New Zealand. For those
who plan to move within a relatively short period of time (three to
seven years), they are attractive because they often include a lower,
fixed rate of interest for the first three, five, or seven years of
the loan, after which the interest rate fluctuates.
Adjustable rate mortgages, like other types of mortgage, may offer the
ability to repay principal (or capital) early without penalty. Early
payments of part of the principal will reduce the total cost of the
loan (total interest paid), and will shorten the amount of time needed
to pay off the loan. Early payoff of the entire loan amount (refinancing)
is often done when interest rates drop significantly.
Adjustable rate mortgages are sometimes sold to unsophisticated consumers
who are unlikely to be able to repay the loan should interest rates
rise, which they often do. In the United States, extreme cases are characterized
by the Consumer Federation of America as predatory loans. Protections
against interest rate rises include (a) a possible initial period with
a fixed rate (which gives the borrower a chance to increase his/her
annual earnings before payments rise); (b) a maximum (cap) that interest
rates can rise in any year (if there is a cap, it must be specified
in the loan document); and (c) a maximum (cap) that interest rates can
rise over the life of the mortgage (this also must be specified in the
loan document).
* 1 The Hybrid ARM
o 1.1 What is the difference between a hybrid and a traditional ARM
o 1.2 The benefits
o 1.3 The risks
* 2 Terminology
o 2.1 Understanding Caps
o 2.2 Crucial Information About Caps
* 3 External links
The Hybrid ARM What is the difference between a hybrid and a
traditional ARM
The dominant loan product in today's marketplace. They are often packaged
as the 5/1 ARM or the 2/28 ARM (most popular products). The loan is
a "Hybrid" because a true ARM adjusts for the same periods
for the life of the loan, ie. a 6 Month ARM is fixed for the first six
months and adjusts every six months afterwards. The 2/28 "Hybrid
ARM" is a 6 month ARM that the borrower has purchased a "Rate
Lock" or introductory rate for the first 2 years (this is also
done in 3,5,7 year fixed periods), and then the loan becomes a 6 month
ARM thereafter, rather than a loan that does only adjust every 2 years.
The benefits
This loan product has actually lowered the costs of borrowing in the
early years of loans, but certainly is a source of continuing refinance
business to the Mortgage industry. They let borrowers take advantage
of special pricing, by saving money on payments a) when the borrower's
salary is rising such as for young professionals or b) when the borrower
knows they are going to move up quickly from one home to another.
The risks
If a borrower is inconsistent in their on time payment history, afflicted
by tragedy which causes a credit problem, or keeps insufficient funds
in reserve (the payment savings from the lower rate for example), as
referenced above, the rates in Hybrid ARMs will certainly rise, and
with insufficient credit and income, the borrower may be forced to trade
equity for time, and in some markets, not as advantageously as today.
VA Adjustable Rate Mortgages and VA Loans http://www.adjustable-mortgages.com
Terminology
* Fully Indexed Rate - The price of the ARM as calculated by adding
Index + Margin = Fully Indexed Rate. This is the interest rate your
loan would be at without a Start Rate (the introductory special rate
for the initial fixed period). This means, your loan would be higher
today if it was adjusting, typically, 1-3% higher than the introductory
rate. Calculating this is IMPORTANT for ARM buyers, since it helps you
predict the future interest rate of your loan.
* Margin - This refers to the banks profit margin above the value of
the financial index. The bank seeks to make a profit above the costs
of inflation. The index is a measure of the cost of funds as measured
by inflation.
* Index - A publicly published financial index such as LIBOR (usually
1 month, 6 month or 12 month), 11th District Cost of Funds Index, MTA,
etc.
* Start Rate - The introductory rate provided to purchasers of ARM loans
for the initial fixed interest period. The difference between the "Start
Rate" of an ARM and the rate of a fixed terms loan is that the
"Start Rate".
* Period - This is the frequency of adjustments, the longer the rate
remains fixed, the better the loan is for the borrower. Typically, the
shorter this is the lower the rate, since there are more opportunities
to adjust upwards.
* Floor - A clause that sets the minimum rate for the interest rate
of an ARM loan. Most loans come with a Start Rate = Floor feature, but
this is primarily for Non-Conforming (aka Sub-Prime or Program Lending)
loan products. This prevents an ARM loan from ever adjusting lower.
An "A Paper" loan typically has either no Floor or 2% below
start.
* Payment Shock - Industry term to describe the severe (unexpected or
planned for by borrower) upward movement of mortgage loan interest rates
and its effect on borrowers. Sadly, for those that do not read this
wiki entry or who do read it but cannot understand its contents, they
may experience it, or spend too much of their incomes to borrow on fixed
terms only. See Caps below
* Cap - Any clause that sets a maximum change for the interest rate
of an ARM loan.
Understanding Caps
* "The Caps" - In industry slang, there you could ask for
the Caps of a loan, and if your broker or loan officer is intelligent
enough to read the rate sheets they are quoting from, it is ALWAYS displayed
and available. This is basic stuff, the ABC's of mortgage lending, if
you're working with someone that can't or won't explain this to you,
go elsewhere.
* What's better? - The lower these numbers are, the better for you,
especially, the first number.
Examples: 2/2/5 ; 5/2/5 ; 2/1/6 ; 3/1/6 ; 2/4 ; 1/1/5 .
The first number is the initial change cap, the second is the periodic
cap, the last is the life cap. When only two values are given, this
always means the initial change cap and periodic cap are the same. The
longer the initial fixed period, typically, the higher the caps are
given.
* Initial Change Cap - ARM loans have a specified maximum first adjustment
that is typically higher than allowed on subsequent changes.
* Periodic Change Cap - The maximum interest rate adjustment for every
subsequent periodic adjustment.
* Life Cap (Ceiling) - The maximum upwards adjustment of an ARM loan.
Typically on first mortgages no more than 6%.
Crucial Information About Caps
Loan caps provide payment protection against payment shock. Most First
Mortgage loans have a 5% or 6% Life Cap. Higher risk products, such
as Monthly Adjustable loans with Negative amortization and Home Equity
Lines of Credit aka HELOC have different ways of structuring the Cap
than a typical First Lien Mortgage.
* First Lien Caps with no Negative amortization
Most First Mortgage loans have a 5% or 6% Life Cap. If the adjustment
period is 6 months or 1 year ( the two most common periods on the market),
then it takes anywhere from 2-4 maxiumum upward adjustments to reach
this cap
* Negative amortization ARM caps
See the complete article for the type of ARM that NegAM loans are by
nature. Most of them are Monthly Adjustable ARMs and the life cap or
ceiling is simply expressed as a maximum rate, usually 9.95% or 10.95%
these days. Beware though, some of these loans have 14-16% ceilings,
you have to ask . . . . The fully indexed rate is always listed on the
statement, but borrowers are shielded from the full effect of rate increases
by the minimum payment, until the loan is recast
* Home Equity Lines of Credit HELOC
Since HELOCs are intended by banks to primarily sit in second lien position,
they normally are only capped by the maximum interest rate allowed by
law in the state they are issued in! In Florida, for example, this is
18% ! Wow!
Sadly, most people do not take the time to learn about their ARM product,
and some people even take these loans out as their First Lien loan,
putting their house in jeopardy of foreclosure if there is an inflationary
market.
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Licensed in Alabama and Florida.
Gulf Shores and Orange Beach Area Info
Climate
The Gulf Coast Area has a mild climate with an average annual temperature
of 67.4 degrees. The average temperature in January is 51.4 degrees.
The average temperature in July is 81.8 degrees. The average annual
precipitation is 67 inches, and the growing season is 292 days.
Education
Education is a fundamental block in building a bright future. The Gulf
Coast Area opened a brand new high school during 1999 in Gulf Shores
(ph. 251.968.4747). The area has two elementary schools; they are Gulf
Shores Elementary (ph. 251.968.7375) and Orange Beach Elementary (ph.
251.981.5662). Gulf Shores Middle School (ph. 251.968.8719) offers an
excellent curriculum in preparation for high school. All public schools
are part of the Baldwin County school system. If you are interested
in private education, you also have the option of Bayside Academy (ph.
251.955.5211), which includes age 3yrs – Grade 4.
Healthcare
The nearest hospital is South Baldwin Regional Medical Center (ph. 800.580.3627)
located in Foley. South Baldwin Medical Center offers 24-hour emergency
services (ph. 251.952.3400). Numerous medical professionals practice
in the area providing both family practice and specialized care.
Airports
Corporate and Private air service is available in Gulf Shores from the
Jack Edwards Municipal Airport, with a full Instrument Landing System
and the longest paved runway being 7000 feet. The closest commercial
air service is available in Pensacola, roughly 30 miles away, at the
Pensacola Regional Airport (ph. 850.435.1746). Major carriers serving
the airport are Continental, US Airways, Delta, Northwest, and American.
Other commercial airports are located in Mobile (ph. 251.633.0313) and
Gulf Port, Mississippi (ph. 228.863.5951).
Shopping
The area offers many shops ranging from casual apparel and beachwear
to upscale fashion and specialty boutiques. If you are a bargain hunter,
you can find 120 factory outlet stores in Foley.
Parks and Recreation
The nearest state park is the Gulf State Park (ph. 251.948.7275). The
6,000-acre park area offers campsites, picnic areas, 18-hole golf course,
825 foot fishing pier, 144 room hotel and convention center. Other parks
in the area include Bon Secour Wildlife Refuge (ph. 251.540.7720), Meyer
Park (ph. 251.968.4420), Johnnie Sims Park and Kids Park (ph. 251.968.4420),
and Wade Ward Nature Park (ph. 251.968.4420).
State/Local Income Tax
For detailed information about Alabama income tax, contact the Alabama
Department of Revenue, Individual and Corporate Tax Division (ph. 251.242.1000).
In most instances, local governments in Alabama do not levy city, town,
or county income taxes.
Property Taxes
Property (Ad Valorem) taxes are taxes on real business and/or personal
property. “Ad Valorem” means “according to value”.
For details, call the Revenue Commissioner’s office (ph. 251.943.5061,
ext. 2840).
