The Return of Adjustable-Rate Mortgage

The recent dramatic increase in mortgage interest rates have caused an alarm for the new home buyers. The rates on a standard 30-year fixed mortgage have gone from record low at below 3.5% to as much as 4.5% recently - which significantly increased the monthly payments that new home buyers will have to pay and making it harder for them to qualify for mortgage loans.

For example, at 3% fixed-mortgage interest rate, you will pay $843 per month for a $200,000 home. At 4%, the payment would be $955. However, if your current credit status only qualified you for a monthly payment of $843, then that means that you can only obtain a loan for $177,000 - preventing you to take on a home that you really want. So, getting an adjustable-rate mortgage will let you spend more on the house you want.

According to Bankrate, even though other mortgage rates have climbed dramatically, the ARM rates have remained steady between 2.7% and 3.1%. As Freddie Mac Vice President and Chief Economist Frank Nothaft said, "with the ongoing run up in fixed mortgage rates, adjustable-rate mortgages are becoming more popular among home owners looking to refinance and for home purchasers."

The disadvantage of ARMs, is that the initial low interest rate is only locked in for the first year. The interest rates will increase as it follows the prevailing market rate for the succeeding years causing your monthly payment to skyrocket Some home buyers were not able to afford the higher reset payments causing them to default on their loans. Others say that adjustable-rate mortgages are to be blamed for the housing bubble.

Here's a piece of advice, before you consider taking up an adjustable-rate mortgage, you need to understand how the future increase in mortgage could affect your future monthly payments. Look at the maximum rate provision stated on the contract - both annually and over the life of your loan. Compute all scenarios, then see if you will be able to meet your future obligations.

 If you need more information on different interest rates, don't hesitate to contact me. I will be more than happy to help.

Home Loan Basics

Home loan makes the dream of owning a house come true.  By obtaining a home loan, owning a home is made easier and quicker for an average income earner.  To have your loan approved quickly, make sure that you have a good credit score and you have all the necessary documents readily available. And once you get approved, it's important to read and understand the loan document clearly.  You have to know all the ins and outs of a home loan.  This will save you time and money in the future.  Here are the basics of home loan to get you started:

1. Fixed-rate mortgage 

A fixed-rate mortgage is a mortgage with a fixed interest rate for the entire term of the loan. The benefit of a fixed-rate mortgage is that the homeowner will have a constant loan payment amounts all throughout the loan term. 

2. Adjustable Rate Mortgage or ARM

An adjustable rate mortgage is a mortgage which has an interest  rate that changes periodically. When you find a document  titled "NOTE" at the top and it says, "ADJUSTABLE RATE NOTE" at the top in big letters, then this means that your loan is an Adjustable Rate Mortgage. A common adjustment schedule might be 2/2/5, meaning, the rate won't adjust for 2 years after  you got your loan, it can go up or down a maximum of 2% a year and caps out at a maximum of 5% higher than your initial rate. In general, interest rates on ARMS will be lower than the interest rates on fixed products in order to compensate the borrower for the added risk of having a variable payment in the future.

3. Mortgage Insurance 

A mortgage insurance is an insurance policy that protects the mortgage lender in case the borrower defaults on the loan. Mortgage Insurance is also referred as Private Mortgage Insurance or PMI. The mortgage insurance is required when the borrower makes a down payment of less than than 20% of the home purchase price. However, the insurance can be cancelled out once the homeowner reaches 20% home equity. This will have a significant effect on your savings per month.

4. Loan Programs

There are different types of loan programs available for different kinds of borrower. To learn which type of loan program that is best suitable for you, please visit http://www.alaskausamortgage.com/programs/

5. Prepayment Penalty

A prepayment penalty is a penalty enforced on a borrower once he/she pays off the loan earlier than scheduled. In practice, the borrower has agreed to pay a certain amount of interest over a certain amount of time. If the borrower, pays the loan off sooner than originally agreed, then there is less interest to pay. Therefore, the lending institution stands to lose money. It is important to understand the prepayment penalty clause should you decide to sell or refinance before the penalty expires. 

For further questions on home loans, please contact your local mortgage lender or call me for a list of reputable lending companies that might be able to help you.