California Introductory Rate ARM's
Most adjustable rate loans (ARMs) have a low introductory
rate or start rate, some times as much as 5.0% below the current
market rate of a fixed loan. This start rate is usually good from
1 month to as long as 10 years. As a rule the lower the start
rate the shorter the time before the loan makes its first adjustment.
Index - The index of an ARM is
the financial instrument that the loan is "tied" to, or adjusted
to. The most common indices, or, indexes are the 1-Year Treasury
Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month
Certificate of Deposit (CD) and the 11th District Cost of Funds
(COFI). Each of these indices move up or down based on conditions
of the financial markets.
Margin - The margin is one of the
most important aspects of ARMs because it is added to the index
to determine the interest rate that you pay. The margin added
to the index is known as the fully indexed rate. As an example
if the current index value is 5.50% and your loan has a margin
of 2.5%, your fully indexed rate is 8.00%. Margins on loans range
from 1.75% to 3.5% depending on the index and the amount financed
in relation to the property value.
Interim Caps - All adjustable rate
loans carry interim caps. Many ARMs have interest rate caps of
six-months or a year. There are loans that have interest rate
caps of three years. Interest rate caps are beneficial in rising
interest rate markets, but can also keep your interest rate higher
than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have
payment caps instead of interest rate caps. These loans reduce
payment shock in a rising interest rate market, but can also lead
to deferred interest or "negative amortization". These loans generally
cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs
have a maximum interest rate or lifetime interest rate cap. The
lifetime cap varies from company to company and loan to loan.
Loans with low lifetime caps usually have higher margins, and
the reverse is also true. Those loans that carry low margins often
have higher lifetime caps.
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