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Adjustable Rate Mortgage Tips
Discounted interest rates
Many lenders offer more than one type of ARM. Some lenders offer an ARM with an initial rate that is lower than their fully indexed ARM rate (that is, lower than the sum of the index plus the margin). Such rates—called discounted rates, start rates, or teaser rates—are often combined with large initial loan fees, sometimes called points, and with higher rates after the initial discounted rate expires.
Your lender or broker may offer you a choice of loans that may include “discount points” or a “discount fee.” You may choose to pay these points or fees in return for a lower interest rate. But keep in mind that the lower interest rate may only last until the first adjustment. If a lender offers you a loan with a discount rate, don’t assume that means that the loan is a good one for you. You should carefully consider whether you will be able to afford higher payments in later years when the discount expires and the rate is adjusted.
Payment shock
Payment shock may occur if your mortgage payment rises sharply at a rate adjustment. For example, if the rate on your discounted 4% ARM were to rise to the 6% fully indexed rate.
If you have an interest-only ARM, payment shock can also occur when the interest-only period ends. Or, if you have a payment option ARM, payment shock can happen when the loan is recast.
Negative amortization
Negative amortization means that the amount you owe increases even when you make all your required payments on time. It occurs whenever your monthly mortgage payments are not large enough to pay all of the interest due on your mortgage—meaning the unpaid interest is added to the principal on your mortgage and you will owe more than you originally borrowed. This can happen because you are making only minimum payments on a payment option mortgage or because your loan has a payment cap.
Prepayment penalties
Some ARMs, including interest-only and payment-option ARMs, may require you to pay special fees or penalties if you refinance or pay off the ARM early (usually within the first 3 to 5 years of the loan). Some loans have hard prepayment penalties, meaning that you will pay an extra fee or penalty if you pay off the loan during the penalty period for any reason (because you refinance or sell your home, for example). Other loans have soft prepayment penalties, meaning that you will pay an extra fee or penalty only if you refinance the loan, but you will not pay a penalty if you sell your home. Also, some loans may have prepayment penalties even if you make only a partial prepayment.
Conversion fees
Your agreement with the lender may include a clause that lets you convert the ARM to a fixed-rate mortgage at designated times. When you convert, the new rate is generally set using a formula given in your loan documents. The interest rate or up-front fees may be somewhat higher for a convertible ARM. Also, a convertible ARM may require a fee at the time of conversion. Prepayment penalties can be several thousand dollars.
Graduated-payment or stepped-rate loans
Some fixed-rate loans start with one rate for 1 or 2 years and then change to another rate for the remaining term of the loan. While these are not ARMs, your payment will go up according to the terms of your contract. Talk with your lender or broker and read the information provided to you to make sure you understand when and by how much the payment will change.
Read below more on Adjustable Rate Mortgages
What is Adjustable Rate Mortgage
How do Adjustable Rate Mortgages work
What are different types of Adjustable Rate Mortgages
Tips on Getting Information on Adjustable Rate Mortgages
This is a blog post for Real Estate Professionals, Investors, Landlord, Property Manager, and Property Management Companies. What to watch out for with Adjustable Rate Mortgages is brought to you by SimplifyEm Pay Rent Online and Property Management SoftwareYou might also want to read:
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