WHICH LOAN IS RIGHT FOR YOU?
Adjustable. Fixed. Balloon. It is easy to get lost in mortgage verbage. Here is a rundown of the most common loans.
ADJUSTABLE RATE MORTGAGES - Your interest rate (and monthly payment) rises and falls with the index to which it is tied. Because they start out two to three percentage points below fixed rate mortgages, they are particularly popular when fixed rates are high. To protect you against interest rate hikes, the best loans put a cap on annual rate increases of two percentage points a year, with a lifetime increase of no more than five percentage points above where you began.
The most popular ARM indexes are those linked to three month, six month, and one year Treasury Bills, the 11th District Cost of Funds(COFI), the prime rate and the London Interbank Offer Rate(LIBOR).
As a rule, ARMS make more sense if you don't plan on staying in your home longer than five years at most. Which index is good for you depends on two things: economic forecast and your personal comfort level.
Libor and T-Bill indexes, for example, react more immediately to changes in the economy, a good thing when interest rates go down, not so good when they rise. Whatever happens, you will see it pretty quickly in your monthly payment.
More conservative buyers prefer indexes linked to the prime rate or the COFI because they more stable and move up or down more slowly than other indexes. That is good when rates are low and rising, less so when they are high and dropping.
Is an ARM good for you? Well, If you need a lower monthly payment to afford the home you want and you are planning to stay less than three to five years, then yes. But make sure you can handle the higher payments that might come down the road. A prudent approach is to always plan financially for the "worst case" scenario: Assume that your loan will always rise the maximum amount. If you wouldn't be able to afford it, then consider another loan.You know your own personal comfort level. Use it to make your decision.
Bryan VogtStrano & Associates, Realtors® - GMAC Real Estate
(618) 355-5824
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# posted by
Bryan Vogt @ 3:13 PM
