Adjustable Rate Mortgages - Determining Rates - part 1
by Dan Lewis
Adjustable rate mortgages are to home buyers as carrots are to bunnies - very tempting. The secret to figuring out if an adjustable rate mortgage is a good deal is the rate index used.
Indexes - Setting Rates
Lenders really want your business and are willing to create enticing loan products to get it. Occasionally, lenders will offer adjustable rate mortgages that offer a lot of carrot on the front end, but none on the back end. These loans are typically offered to you with an insanely low initial interest rate, which has you looking at mansions and other structures completely out of your realistic price range. The problem with these loans is the rate rises dramatically after six months or a year when the rate becomes pegged to an index.
Indexes are a unique animal when it comes to the mortgage industry. An index is a calculation of general interest rates charged across a number of financial markets that a bank uses to set a real interest rate on your loan. Common financial markets or products considered in this index include six month certificate deposit rates at local banks, LIBOR, T-Bills and so on. Let's take a closer look.
1. Certificate Deposits - Better known as "CDs", these are the fixed time period investing vehicles you can get at your local bank. You agree to deposit a certain amount for six months and the bank gives you a guaranteed interest rate of return such as three percent.
2. T-Bills - Officially known as Treasury Bills, T-Bills are the credit cards for the federal government. Currently, Uncle Sam owes trillions of dollars on his and pays a certain interest rate on the debit. The interest rate is used by lenders in calculating your ARM rates.
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Adjustable Rate Mortgages - Determining Rates
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