Is an adjustable rate mortgage right for you?
Julie Garton-Good, GRI, DREI

The interest rate may be lower, your ownership time may be short--from all indicators, it looks like an adjustable rate mortgage (ARM) will best suit your financing needs. But wait. Before signing on the dotted line for the ARM, there are questions you should pose to the lender--questions that if unanswered, may signal trouble (or at least blurred communications) later. Prior to agreeing to an adjustable rate mortgage, ask the lender:

  1. Which indices are available for your ARM programs?If you've read the other two ARM buyer tips this month for The Frugal HomeOwner™, you know that the index plus the margin equals the interest rate on ARM loans. Lenders choose the index they place on the loan. These can be Treasury Securities, cost of funds index, etc; so it's important up front to choose the most favorable index for you, rather than the most profitable index for the lender! The lender will be glad to show you a graph depicting how each index has performed historically. While not a clear indication of their future performance, you'll be able to tell which indices are most consumer-friendly.
  2. What are the margins on various ARM programs offered? The lender also sets the margin (which is the lender's cost of doing business plus profit). All things considered, choose the lowest margin since it doesn't fluctuate during the life of the loan like the index does.
  3. What are the various adjustment periods on ARMs you offer (i.e. one year, three year, seven year, etc.) and which would best suit my financial picture?If you plan to move in less than three years, choosing a three-year ARM could mean that you'll be out of the house (and the loan) before the first adjustment occurs. The lender will be glad to pencil out examples of what you stand to win (and lose) by choosing a certain adjustment period.
  4. How can I determine if my payment adjustment is correct? With the high volume of loans being adjusted, it stands to reason that there may be errors made in re-calculating interest rates from time to time. What could alert you? Perhaps the payment has skyrocketed since the last adjustment. Or there has been very little inflation to push your payment higher, yet a substantial adjustment is shown. Most lenders have toll-free telephone numbers you can call to question the new payment and/or to have it re-calculated if you feel an error has been made in calculating the payment. In most cases, you will receive a written reply within 30 days or even sooner.

Adjustable rate mortgages can give you increased qualifying and buying power. But make sure you ask questions and obtain answers from the lender before committing. Waiting can cost you precious dollars and peace of mind.