This is part five in a five part series on what you need to know about mortgages before you buy a home. The housing market is an interesting beast, because it comes and goes, rises and falls, allows some people to flourish and brings others to ruins. If you want to understand how the housing market works, you should begin with an introduction to mortgages.
For example, if you take out a 5/1 year adjustable rate mortgage, then this would mean that your initial interest rate amount is going to remain the same for a period of five years, and then its going to adjust every year beginning with year six. On the other hand, if you take out a 3/3 year adjustable rate mortgage, then your initial rate of interest is going to remain the same for a period of three years at which time it is going to adjust again every three years but beginning with year 4.
There may also be caps, which are limits, telling you how high your adjustable rate mortgage interest rate is capable of going over the entire life of the loan, as well as how much it is capable of changing with each individual adjustment. Periodic or interim caps are capable of dictating how much the interest rate can rise with each individual adjustment. The terms of the loan, for example, may be that the rate can go up a single percentage point with every year depending on the conditions of the market. Lifetime caps on the other hand are going to tell you how high your adjustable rate mortgage rate can go up in the entire length of the adjustable rate mortgage loan. For example, your adjustable rate mortgage terms may say that the rate can never go up more than 6 points in the entire length of the loan.
The interest rates for a adjustable rate mortgage can be tied to a US Treasury Bill, a LIBOR or London InterBank Offer Rate, a Certificate of Deposit or CD or numerous other indexes as well. When lenders giving out mortgages come up with their adjustable rate mortgage rates, they look at these indexes and then add an additional margin of between 2 percentage points and 4 percentage points. When you are tied to an index rate that means when that index's rate goes up, your adjustable rate mortgage interest rate is going to go up as well. The flip side to the equation is that if the interest rates go down in the index, your adjustable rate mortgage interest rates will also go down as a result.
The best way to understand how this adjustable rate mortgage interest rates work is to play around with a adjustable rate mortgage calculator to get a feel for how they are calculated.
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Originally posted 2009-08-25 03:30:47. Republished by Blog Post Promoter
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