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Debbie Siegel's Mortgage Minute
Adjustable Rate Mortgages - How the Index & Cap Can Affect Your Deal
An adjustable rate mortgage (ARM) can be a valuable tool for real estate
investors seeking lower monthly payments and higher cash flow. But buyer
beware. It's important to know the index to which your adjustable rate is
tied, the margin, the adjustment period, and the cap so that you fully
understand your loan.
Index. The three most commonly used ARMs indexes include:
- LIBOR, the London Interbank Offered Rate. A standard financial index
used in U.S. capital markets, this is the interest rate at which banks
offer to lend money among themselves within London's wholesale money
markets. LIBOR changes tend to be smaller than prime rate changes.
- MTA, a 12-month Moving Treasury Average. An index determined by the
monthly average of one-year Treasury bills.
- 11th District COFI, a monthly cost-of-index. An index that reflects
the weighted-average interest rate paid by 11th Federal Home Loan Bank
District savings institutions for savings and checking accounts. It's
published at the end of each month to reflect the cost of funds for the
prior month.
* Next 37 17 investors only!
Margin. The margin is a percentage the lender adds to the base index
rate. It accounts for the lender's cost of doing business and any profit
the lender will make on the loan.
Adjustment Period. ARMs are often described in terms of their adjustment
period, which is the period between potential interest rate adjustments.
Typically these are 1-year, 3-year or 5-year.
Cap. The cap reflects how high the ARM interest rate can climb during a
specific time period, which is typically defined as six months, a year,
or the life of the loan.
Understanding how your ARM rate will be determined and how high it could
potentially go is critical for real estate investors. It could spell the
difference between a great deal and an unpleasant payment surprise.
Got questions about real estate financing? Contact
Debbie@westchester-mortgage.com
or 617-965-1236. She'll consider them for
inclusion in a future column. Debbie Siegel is president of Westchester
Mortgage in Newton, Mass. She is licensed in several Northeastern states.
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