Here are some things to consider with an ARM or a Hybrid ARM:
- Is my income likely to increase enough to cover higher mortgage payments if interest rates go up?
- How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not present the risk they do if you plan to own the house for a long time.)
- Can my payments increase even if interest rates generally do not increase?
- What index will be used to adjust the mortgage rate? Ask the lender for a table showing movements in the index over the previous 10 years to see how your mortgage payments would have changed.
- How often will the interest rate be adjusted? Every year? Three years? Five years? The longer the adjustment period, the better you will be able to plan your future loan cost.
- What is the initial mortgage interest rate? Does it include a special discount or “teaser?” If so, you could face a large increase in your monthly payments when the interest rate is adjusted for the first time.
- What is the margin on the interest rate? The margin is the amount that the lender adds to the index rate to calculate your mortgage rate. For instance, if the index rate is 7 percent and the margin is 2 percent, your overall interest rate would be 9 percent.
- What limits or caps have been placed on the adjustments? One of the most important items to discuss with your lender is the maximum amount that your mortgage rate can increase in any single adjustment period and over the life of the loan. Find out the "worst case" situation in the event of a sharp increase in your index rate.
- Is the loan convertible? If so, is there a cost to convert? Convertibility allows you to change your ARM to a fixed-rate loan at some designated time in the future.
- Is there a prepayment penalty? If you refinance your loan with a new loan, you may be assessed a fee.
Finding the correct mortgage for your family's particular needs is a very important step in the home building process. Be sure to thoroughly research all available options, and speak to several home finance professionals prior to making a decision. Selecting the wrong initial financing option can turn out to be a costly one.
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