Adjustable Rate Mortgages – How the Index _ Cap Can Affect Your Deal.pdf by sushaifj


									Mortgage Minute

Adjustable Rate Mortgages – How the Index & Cap Can Affect
Your Deal
Debbie Siegel, President, WESTCHESTER MORTGAGE

                     An adjustable rate          Margin. The margin is a percentage the
                     mortgage (ARM) can be       lender adds to the base index rate. It
                     a valuable tool for real    accounts for the lender's cost of doing
                     estate investors seeking    business and any profit the lender will
                     lower monthly payments      make on the loan.
                     and higher cash flow.
                     But buyer beware. It's      Adjustment Period. ARMs are often
                     important to know the       described in terms of their adjustment
                     index to which your         period, which is the period between
adjustable rate is tied, the margin, the         potential interest rate adjustments.
adjustment period, and the cap so that           Typically these are 1-year, 3-year or 5-
you fully understand your loan.                  year.

Index. The three most commonly used              Cap. The cap reflects how high the ARM
ARMs indexes include:                            interest rate can climb during a specific
                                                 time period, which is typically defined as
•   LIBOR, the London Interbank Offered          six months, a year, or the life of the loan.
    Rate. A standard financial index used in
    U.S. capital markets, this is the interest   Understanding how your ARM rate will
    rate at which banks offer to lend money      be determined and how high it could
    among themselves within London's             potentially go is critical for real estate
    wholesale money markets. LIBOR               investors. It could spell the difference
    changes tend to be smaller than prime        between a great deal and an unpleasant
    rate changes.                                payment surprise.
•   MTA, a 12-month Moving Treasury
    Average. An index determined by the
    monthly average of one-year Treasury
    bills.                                               Got questions about real estate
•   11th District COFI, a monthly cost-of-               financing?
    index. An index that reflects the                    Contact Debbie@westchester-
    weighted-average interest rate paid by or 617-965-1236. She’ll
    11th Federal Home Loan Bank District         consider them for inclusion in a future
    savings institutions for savings and         column. Debbie Siegel is president of
    checking accounts. It's published at the     Westchester Mortgage in Newton,
    end of each month to reflect the cost of     Massachusetts. She is licensed in
    funds for the prior month.                   several Northeastern states.

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