Do Adjustable Rate Mortgages Scare you?

There is a stigma that adjustable rate mortgages (ARMs) are bad loans and that fixed rate mortgages are the only way to go. It is true that ARMs have hurt a lot of people in the past. However, today, some ARMs can benefit you greatly.....if you are careful about how you use them.


History...
ARMs have been around for a very long time, but they did not become popular until the 1980s. In the 1980s, mortgage rates were running at about 8%. The government had a cap on how high mortgage rates could be(8%), so instead of changing things, mortgage companies would charge points on the loan. (1 Point = 1 Percentage of the loan amount). It got to the point where people were paying 8% rates and 15-16 points on a loan. So, if you have a $200,000 home, this means that on top of a down-payment, you could be paying about $32,000 in points.



Because of this problem, the government decided to change the caps on what mortgage rates could be. They changed them to 10%. Well, it came to a point again, where rates were maxed out and points were being charged so the government changed the cap again. The trend kept going on and on, and people were paying what we would think, today, are outrageous rates for their homes.



This is when ARMs came into play.....


How do ARMS work?
An ARM rate is figured by taking the index average (either Treasury or LIBOR) and adding the margins. The margin is how much the rate can go up. So, let's say that the US Treasury index is .36% and the margin is 2.75%. This means that the rate is 3.11%. When you come to the end of the term, your interest rate can change. It will go up or down based on what the indexes are at the time.



The government sets a cap on how much your interest rate can rise. So, for easy numbers, lets say that you have an initial rate of 5% for 3 years. After that initial 3 year period, your rate can change every year until you either refinance or pay the loan off. Let's say the loan has a cap of 5%, meaning that your loan can never go over 5% higher than your initial rate. You also have a cap on how much it can change on every term, let's use 2%. So, you start out with a 5% rate. After 3 years, let's say that the index rises. Your rates cannot exceed more than 2% higher than the initial rate so you are maxed at 7%. The next year, the index rises again. Your rates cannot go higher than 9%. The next year the index rises again. Your rates cannot go over 10% because of the cap that is on the loan.



This being said, ARM loans in the 1980s through the 1990s mostly did not have caps. So, let's say that you started out with a 5% rate. Your rate can rise after the first year to 15%. This is where a lot of people really got hurt, and it is also when the government started capping how much a rate can go up.

When would it be a good time for me to get an ARM?
Most people will live in their first home less than 5 years. So, maybe a 5/1 or 7/1 ARM would be a good idea. This will get you a fixed rate for 5 or 7 years. You may end up getting as much as a full percentage point better on rates. This could save you a lot of money.
An ARM is also a great idea if you are very careful with your finances. If you are a person that is meticulously looking at your bank statements everyday, and you keep track of everything, you can save a lot of money by getting an ARM. Remember, you can refinance out of the loan you are in as long as your home holds its value, you have on-going income, and your credit stays the same. Just don't get in the habit of refinancing every year...that can become expensive.

What should I look for when I'm talking to my loan officer about an ARM?
Make sure when you get the ARM Disclosure, you read it carefully. Make sure that you are absolutely aware of how high the caps are. Make sure you are asking them about pre-payment penalties. Find out how long your rate is fixed. Ask how often rates can change. Make sure that you are completely comfortable with the loan. If you are not comfortable with it, it is not the loan for you.

Tax Credit in Missouri!

Everyone is bummed about the federal tax credit not getting extended. There is some money you can get, though!!

If you live in Missouri, and you are buying a home in 2010, you are eligible to receive $1250! Missouri Housing Development Commission will refund First Time Home Buyers up to $1250 for their property taxes. It is part of the HOPE program they have. If your property taxes don't amount up to $1250, you can get up to the amount of your tax bill. So, if you have an $800 tax bill, you can qualify for $800.

This is only applicable if you qualify under MHDC conditions. You must be a first time home buyer. You must be under the income limits. For a 1-2 person household, the income limit is $68,400. You must be above the age of 18.