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How Do I Shop For An ARM?

Adjustable rate mortgages have been a great tool for borrowers all over the country for the last couple of decades.  But have they?  Generally speaking adjustable rate mortgages are a fantastic way to finance your home provided you know and understand the chemistry of the loan.  Let's look at a few details that get overlooked when borrowers are shopping for a new ARM. 

First, let's set aside the start rate for a moment.  Why?  Of course the start rate is important but it virtually has no impact on what happens when your loan adjusts at the end of the initial fixed period.  Ok, here is how an ARM works...

Assumption:  3 Year ARM / Start Rate = 5.750% / Points = Zero 

Use this formula when shopping (in conjunction with the start rate)R = M + I

The following formula is utilized by the lender everytime your loan is set to adjust.

Rate = Margin + Index (what the heck does this mean?)

Ok, we know my start rate is 5.750% with zero points, but what happens at the end of the 3 Year ARM period?  Did you think to ask your lender what the margin of your loan is?  Probably not...  Most people never ask me but I make sure they know and understand how it will impact their future.  Hmm, I can explain to you what has happened in this country with our lending practices that FNMA, FHLMC, Banks, and Wall Street won't tell you.  Congress doesn't even understand!  Surprised?  Oh well, back to the ARM.

Margin:  Margin is the profit of the lending institution at time of adjustment.  So if you have a 3/1 ARM, that means the first 3 years is fixed and then your rate can change annually every year for the term of your loan, typically 27 years of adjustments remaining on a 30 year loan.

OK, PAY ATTENTION:  The MARGIN is fixed at time of origination (when you close on your great low introductory rate).  The margin can range anywhere between about 2.750% - 7.000% (the good old days margins were as low as 1.95%).  Remember, whatever the margin is that you get, you have it for the life of the loan.  So folks, ask the question - what is my margin?  Wouldn't you want a 2.750% margin vs. 7.000%?  Yeah, yeah I know you think you will only keep this loan for the 3 year fixed period and then move or refinance, right?  Well, maybe not in today's market with values dropping and lending standards tightening.  So shop for a lower margin it will payoff in the long run.

Index:  The index is the variable at time of adjustment.  The following indices are the most common:

1 Year T-Bill Index or 6 month T-Bill
1 Year LIBOR or 6 month LIBOR
11th District Cost of Funds Index


In our example above, at the end of the initial fixed 3 year period the lender must determine how to calculate the new rate.  Remember, R = M + I is utilized by the lender/servicer of your mortgage to calculate the new rate.  So now it's time to adjust because you are at the end of your 3 Year ARM.  The NEW rate:

Margin - 3.250% (You didn't shop for a lower margin 3 years ago so now you pay)
Index - 4.000% (This rate is determined usually 45 days prior to your adjustment)

NEW RATE = 7.250% Your loan does have caps so we will discuss this later.

If you had asked for a lower margin say 2.750% what would your new rate be?

That's right 6.750% vs. 7.250%!

Remember:  R = M + I when shopping for an adjustable rate mortgage

Call today 703.691.0958 or Apply OnLine and we will make sure you get the absolute best loan terms in the market.  At Executive Lending Services, Inc. all of our staff members are trained advisors.  We welcome your questions.  For an individual consultation please call 703.691.0958 and we will provide the best Virginia mortgage rates.

Executive Lending Services, Inc.
4041 University Drive, Suite 302, Fairfax, VA  22030
Office:  (703) 691-0958
Fax:  (703) 991-8687
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