WHEN Jacalyn Wright bought a singlefamily house in Meriden in March 2006, concerns about her mortgage payments put a slight damper on the excitement of owning her first home. Originally hoping to spend no more than $1,200 or $1,300 a month on mortgage payments, she ended up taking out two adjustable rate mortgages, or ARMs -- one covering 80 percent of her $199,000 loan and another covering the remaining 20 percent -- resulting in combined monthly payments of about $1,600. She financed the entire mortgage, with no down payment. Though worried about the financial impact, she was driven by the American dream of owning a home, she said.
Homebuyers and commercial real estate investors who obtain funds using mortgages face the choice of a fixed or an adjustable rate mortgage. Fixed rate mortgages have constant payments, but a high initial rate: adjustable rate, interest-only or hybrid mortgages begin with lower rates, but change at fixed intervals over time. Using a straight forward forecasting model, we find that short rates can be forecasted. However, given the limited duration of the cost advantage in the study period, and the transaction and penalty costs of adjusting a borrowing strategy, the decision may not be economically significant.
If you have an adjustable-rate mortgage, you need to monitor closely what may happen to your rate at the next adjustment. Compare your new payments with those you would qualify for on a fixed-rate loan, and then calculate how long it would take for your monthly savings to make up for closing costs and any prepayment penalties. If the break-even point is one year, that's great," says Mari Adam, a financial planner in Boca Raton, Fla. "Two years is good, too. And if refinancing gets you out of an insecure loan, it may be worthwhile to switch to a fixed rate even if you won't break even for three or four years.
A home lender can be sued for fraud based on its alleged failure to clearly disclose the negative consequences when only the scheduled monthly payments are made on an adjustable rate mortgage loan, the has ruled in reversing a dismissal. The plaintiff obtained an option adjustable rate mortgage (ARM) loan from the defendant. He sued for fraud under state law, alleging that loan documents failed to adequately disclose that "negative amortization" occurred when he only made his monthly payments in accordance with the schedule provided by the defendant.
Changes in an adjustable-rate mortgage's (ARM) interest rate result primarily from changes in the index rate on which it is based. Borrowers whose mortgages are based on an interest rate known as Libor might face a higher interest rate than the comparable borrower whose mortgage is tied to the other frequently used index, which is based on US Treasury rates. Using actual data for the six-month Libor and assuming a rate of 3.0% otherwise after July 2008, the authors see that interest rates, on average, stay roughly the same or fall for Libor-based mortgages scheduled to see their first rate reset in the second half of 2008. Interestingly, interest rates for mortgages that were adjusted for the first time before July 2008 are now about a percentage point higher than their initial rates, o...
Adjustable rate mortgages - Cover Story
First, the bad news: If you're among the millions who took out an adjustable-rate mortgage in the past few years, your monthly payment is likely to rise on the next adjustment date - by 20 percent, 30 percent, even 40 percent. Blame the Federal Reserve for driving up short-term interest rates. But there's good news, too: You can still get a good deal refinancing to a 15- or 30-year fixed-rate mortgage. Thank the bond market, which has defied the Fed and kept long-term rates low.
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