Adjustable-Rate Mortgages

The popularity of adjustable-rate mortgages (ARM) has created a new dictionary of terms that savvy buyers need to understand before financing their homes with an adjustable rate loan.

THE INDEX. This is the basis in which the interest rate will adjust (Some move more slowly because they're averages, such as the 11th District Cost of Funds. These are preferable in a market when interest rates are climbing. Others move more quickly, such as the six month CD rate or one-year Treasury Bill and are more attractive when interest rates are falling.)

THE MARGIN. This is the lender's profit in the form of interest, tacked onto the index to create the total interest rate charged.

THE CAP RATE. There are two to be concerned about: The life cap is the maximum amount the interest rate will ever be for the loan. The annual cap is the highest the interest rate can climb each year.

THE POINTS. One point equals one percent of the loan amount. This is charged by the lender as a loan-origination fee. Usually, as this goes up, the margin goes down and vice versa.
When shopping for an ARM, become familiar with the index used, the margin, maximum annual payment and interest increases, lifetime "cap" maximum interest rate and see if the ARM is assumable, by a future buyer of your home.

Fixed-Rate Mortgages

If you plan to stay in your home less than seven years, an adjustable-rate mortgage (ARM) can save you interest.

If you plan to keep your home over seven years, a fixed-rate mortgage is usually the safest.

Should interest rates plummet, you can refinance. If interest rates rise, a fixed-rate mortgage protects you because your payment cannot increase.

Types of Mortgages

There are several types of mortgages. For your own reference, here are the best known and most frequently used:

DEED OF TRUST MORTGAGE
This is a mortgage in which title to a property is given to a third party, or trustee, as security for an obligation or debt owed to a lender. This is also called a trust deed and is not offered in all states.

OPEN-END MORTGAGE
This type of mortgage sets a limit that can be borrowed on a property and allows incremental advances to be made with the same security.

MORTGAGE WITH RELEASE CLAUSES
This type of mortgage sets a limit that can be borrowed on a property and allows incremental advances to be made with the same security.

JUNIOR MORTGAGE
A Junior Mortgage is actually a second or third mortgage on a property. It's a higher risk and more expensive mortgage than a first mortgage and is given a lower priority by lenders.

PURCHASE MONEY MORTGAGE
This mortgage uses a loan to purchase property where the property purchased is used to secure the loan itself.

CHATTEL MORTGAGE
Chattel is anything other than real estate which is used to secure a mortgage for a piece of property. Chattel Mortgages are used when additional security is needed for a loan or when it's important to identify certain personal property assets.

PACKAGE MORTGAGE
This mortgage is most often used when building or buying a new home whereby, not only is the cost of the home included in the mortgage but, major essential furnishings to be purchased are also included. Payback time for the furnishings is usually less than for the real estate mortgage.

BLANKET MORTGAGE
A Blanket Mortgage is used when more than one piece of property is used to secure the loan.

WRAPAROUND MORTGAGE
This mortgage is used when an additional mortgage encompasses an existing mortgage. This mortgage type is especially popular when interest rates increase, because it provides a method of obtaining a lower interest rate loan.

BALLOON MORTGAGE
A "balloon" is the unpaid balance that must be paid on a specific due date. On the due date, which may be only a few years after the loan was made, the balance must be paid off or the loan renegotiated.

REVERSE
A mortgage that offers retirees a one-time cash windfall, access to a line of credit, a lifetime annuity or a combination of these. The money is secured by the borrower's home, which is sold after the borrower's death to pay off the principal and interest.

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