Fixing Your Rate.com

Here is what Federal Reserve Chairman Ben Bernanke stated recently:

“In all likelihood, the housing contraction would have been considerably milder had it not been for adverse developments in the subprime mortgage market,

Since early 2007, financial market participants have been focused on the high and rising delinquency rates of subprime mortgages, especially those with adjustable interest rates,” he added.

About 21 percent of subprime adjustable rate mortgages are 90 days or more delinquent, and foreclosure rates are rising sharply, according to the Fed.

Some 2 million homeowners are due to have their adjustable rate mortgages, or ARMS, reset over the next year and risk losing their homes.”

The initial rate and payment amount on an ARM stay the same for a specified period of time–ranging from just 1 month to 5 years or more. Sometimes the initial rate and payment varies substantially from the term’s later rates and payments. The interest rates you are charged doesn’t necessarily depend on interest rates generally but on the stated terms of the contract you have entered. If lenders or brokers quote the initial rate and payment on a loan, ask them for the annual percentage rate (APR). If it’s a lot higher than the initial rate, then your rate and payments will probably be a lot higher when you get to the adjutment period. Interest in the adjustment period may be capped - that is limited to a stated rate or not. If you do not have a cap you are open to unlimited increses in your aret and monthy payments.

As far as the adjustment period is concerned, the interest rate and monthly payment will change every month, quarter, year, 3 years, or 5 years de[pending on the contract. The adjustment period of a loan will depend on the stipulation in the contract. A 1-year ARM , for instance, will change once every year.

The interest rate on an ARM is made up of two parts: the index and the margin. The index is a measure of interest rates generally, and the margin is an extra amount that the lender adds. Your payments will be affected by any caps, or limits, on how high or low your rate can go. If the index rate moves up, so does your interest rate in most circumstances, and you will probably have to make higher monthly payments. On the other hand, if the index rate goes down, your monthly payment could go down. Not all ARMs adjust downward, however–be sure to read the information for the loan you are considering.

The index used will be stated in the contract and is usually a published index like the LIBOR rate or it can be the Lender’s own cost of funds rate which is harder for the consumer to track.

Some lenders base the amount of the margin on your credit record. Compare margins when examining competing offers of ARM’s.

In a period of adjustment, a borrower with an ARM is isbject to vagaries of the interest rate marketplace and the terms of the contract. Either or both can end up being punishing amounts added to your monthly payments. If your credit is bad or detriorating, and if housing values are declining as they have been recently the ARM contract can be a borrower’s monthly nightmare. If you have an ARM first understand it’s terms. Then examine the structure of the original loan. Finally update all the pertinent data. Value of home, amount of loan and other equity debt and see if you qualifiy for a refinance to a fixed rate mortgage loan. If you qualify, refinancing may well be an option you want to take. There will be costs involved in the refinancing and you must examine the amount you as the borrower will have to bear.