Mortgage question - FREAKING out!

[AndyMan 7]

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They most certainly do follow the fed rate charged for overnight loans to banks. It isn't an immediate raise the next day after the fed, but when the fed raises rates, you can be sure that mortgage, loan, credit card, etc. rates will also rise in the near future.

Well, I'll certainly agree that they do tend to wander in the same direction.... But if someone wanted to predict when mortgage rates were changing, they'd do much better to watch the 30 year bond, and the 10 year note, than whatever the fed is doing at any time.

In any regard, Mortgage rates are still at historically low values, and any rises over the next year or so are expected to be very gradual. It's certainly a good time to buy a house.

_Am

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You put the fun in "funnel" - craichead.

[freeflybella 0]

Here's a scenario, I can qualify for a 10-year ARM at a margin of 2%.

Right now, that means my rate is 4%.

Every 6 months that 2% is added to the '6-month LIBOR' index (?) and that is my rate for the following 6 months. Therefore, if LIBOR goes down to 1.75, my next 6 month rate is 3.75. If it goes up to 2.25, my rate for the next 6 months is 4.25.

The cap is 10%.

The LIBOR index is supposed to be the lowest and most stable.

I will have 10 years of that. (Keep in mind, I'm planning to sell in 3-5 years, max)

Also, there is no penalty for paying above the monthly interest rate - and that goes straight to principle. And since the mortgage re-amortizes every month, if I pay extra (toward principle) my loan - and interest - goes down.

Essentially, I could be paying 50% interest and 50% principle right off the bat - when fixed rate mortgages don't make a dent in principle for years.

Someone please tell me what I'm overlooking. Seriously. Is it only the 'unknown' of the LIBOR index (that's big, don't get me wrong)?

Action expresses priority. - Mahatma Ghandi

[Jimbo 0]

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I wouldn't go for an ARM (adjustable rate mortgage). There's only one place interest rates will go from where they are now, and that is UP.

True, but some people need the ARM to keep the payments down. I don't know about most, but at least some are bound by terms. For example, I've got a 5 year ARM that can never go up more than 2% per year (after the 5th year) and has a cap at the original rate + 6%. It made sense for me.

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Also, there is no penalty for paying above the monthly interest rate - and that goes straight to principle. And since the mortgage re-amortizes every month, if I pay extra (toward principle) my loan - and interest - goes down.

Make sure with whatever loan you go with that there's also no penalty for paying the entire loan early. I know a few people who get royally screwed if they pay the mortgage off early.

-
Jim

"Like" - The modern day comma
Good bye, my friends. You are missed.

[freeflybella 0]

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and has a cap at 6%

Who's your lender?!

Also, I WON'T be paying off my mortgage early!
I'll just be paying toward it - if I want to. I checked - no penalty. Maybe that's why my cap is higher?

Action expresses priority. - Mahatma Ghandi

[Flyer2Diver 0]

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If I know I'm only going to own the house for 3 years - but get a 5 yr. ARM, just in case - and I'm pretty sure the house will appreciate just by cutting the grass...

That's exactly what I did - I did a 5-1 ARM which is fixed for the first 5 years, then it adjusts. I kept the place for 2 years - just long enough to avoid capital gains tax, and sold it. Worked out great for me, but if the real estate market tanked, it could have been a problem (I'd be forced to hold the investment or take the loss - and during that time the interest could start adjusting and increasing the monthly payment).

Blue Skies

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[loumeinhart 0]

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And since the mortgage re-amortizes every month, if I pay extra (toward principle) my loan - and interest - goes down.

Yea, I will never get a fixed rate mtg, - I'll make extra payments on a 2/28 arm all day long -

also - on most libor arms, your rate will never go below your initial rate - you'll see that in the ARM disclosure statement. So, if you get 6% but next year the adjustment would have you at 5.5, you'll just sit at 6. - .. notice I said "most" libors

[rmsmith 1]

I recently read in a newspaper that roughly 75% of all mortgages written in California during the past three years were ARM's, and that down payments were only 5%. While this might look nice while property values rise 18-20% annually, there will certainly be serious trouble ahead as rates rise due to deficit spending. A downturn will wipe-out many middle-class families who are deeply in debt.

[Jimbo 0]

Aren't most ARMs capped? Mine is fixed for 5 years, can't raise more than 2% per year after 5 years, and can never go beyond the initial rate + 6%.

-
Jim

"Like" - The modern day comma
Good bye, my friends. You are missed.

[tigra 0]

There are a lot of different ARM programs out there. The traditional ARM has a life time cap and annual adjustment caps as you describe. Perfect for a first home you really don't plan on staying in for too long. But the ones that offer "too good to be true" initial interest rates typically adjust more frequently (monthly) while the payment amount adjusts annually. Your interest rate ins increasing while your payment isn't, resulting in unpaid interest being tacked on to your principal balance. If you aren't paying attention to your monthly interest rate or if you are just making the minimum payment required, after a few years, you could end up owing significantly more than what you borrowed. And typically, instead of caps on the interest rate, the caps are on the monthly payment amount. (As in, regardless of how high the rate is, your minimum payment won't go any higher than "x", which really just gets you in more trouble with the negative amortization.) They aren't necessarily bad loans for the right consumer, BUT the advertising for them is deceptive at best.

[rmsmith 1]

Here's an informative article. Historically, the average family could never enter into a mortgage that was 2.5 times your annual household income, but deregulation has produced some fancy fine print.

[tigra 0]

That's interesting. One reason I made a career change (I used to close residential real estate closings- purchases, refinances and equity loans) was that I was really sick of the predatory nature of the business (and some of the mortgage brokers I had to work with on a daily basis.) There were days when I really needed a shower when I got home!

When I purchased my home last year, the fixed rates were so good, and I didn't think I'd be moving any time soon, so I didn't even bother looking at the ARM products. IMO, the Negative Amortization ARM products are really only good for the very informed and disciplined consumer. All too often, that's not the target market for those products! (And DON'T get me started on prepayment penalties!)