Tuesday, June 21, 2005

Major red flag of adjustable real estate loans

Adjustable-rate mortgages (ARMs) are becoming increasingly popular with borrowers, and the cost of borrower ignorance about ARMs is growing with it. Every day I encounter misperceptions that have led to bad decisions, or are about to.

To avoid getting trapped into a bad ARM, it is very useful to understand the difference between the interest rate and the fully indexed rate (FIR).

The ARM interest rate is the rate you see: it is the rate quoted by the loan provider, and the rate shown in the media. It is the same as the rate on a fixed-rate mortgage, with one difference. The ARM rate holds only for a specified initial period. That period can be as short as a month, and as long as 10 years. At the end of that period, the rate is adjusted.

The FIR is the rate you don't see. It is never quoted, never shown in the media, and is not a required disclosure. Yet it is the major indicator of what will happen to the rate at the end of the initial rate period.

If the initial rate period is long and the borrower expects confidently to be out of the house before it is over, the FIR is unimportant. But if the initial rate period is short, or if there is a reasonable probability the borrower will still have the mortgage when it ends, the FIR is critically important to the borrower.

The flexible-payment, or "option" ARM, which has been growing in popularity, has an initial rate period of one month. It is a favorite instrument of hucksters because they can advertise rates as low as 1 percent. They don't bother to mention that this rate holds only for the first month. The FIR, which provides the best clue as to what the rate may be in the 359 months that follow, is seldom volunteered.

Read the entire Inman News article by Jack Guttentag


Payday Loans said...

Nice informative blog . Please visit us at Payday Loan for your Payday Loans solution. We would also love your presence at No Fax Payday Loan & Payday Cash Loan and share a moment with us. welcome!!! to Payday Advance Loan , ur presence and comments will brighten our blogs.

Personal Loans said...

Kindly share a piece of your knowledge on our Personal Loan .

Auto loans said...

We found Nice and clear knowledge from your Blog. Please share your thoughts on our blog Car Loan also.

Shawn T Lippert said...

Thank you for the informative blog
Here Is some additional Loan resources for
Loans if you or your readers are interested

quick cash loan said...

good information

fast cash loan said...

nice information

TimmyPowers said...

I was not sure to expect when I visited your blog. Well I think the information on this blog is great. I have my own blog and I wish I got half as many constructive comments as your blog does. Anyways, I am a teacher at a University and I am always doing research on various topics. This weeks topic relates 100% to your blog. I already bookmarked you for future use. If you want to exchange information I will leave my link at the bottom of this. If you don?t mind I will add my 2 cents to this blog topic once in awhile. Although most of the time I just like to read and see what other people?s thoughts are! (hey I am a teacher!)
Thanks again!adjustable basics mortgage rate.

geldlening said...

Hi Blogger! Ik ben op zoek naar een geldlening Zou Afab echt zo goed zijn als iedereen beweert? Of kan ik beter zoiets als Geldshop proberen?

Groetjes Albert

lening said...

Hi Blogger! Ik ben op zoek naar een lening Zou Afab echt zo goed zijn als iedereen beweert? Of kan ik beter zoiets als Geldshop proberen?

Groetjes Albert

online mortgage said...

Alot of interesting comments on this blog, I was searching for ##keyword## related info and some how came across this site. I found it pretty cool, so I bookmarked. I'll really liked the second post on the front page, that got my attention.
My site ##link## is in a bit different area, but just as useful. I have a ##keyword## site focusing on mortgage refinancing related topics.