Tell me more about ARMs?
Adjustable-rate mortgages "are tied to an index which is a measure of the lender's cost of borrowing money. As the index rises, so will the interest rate on the adjustable loan," according to Dian Hymer, author of "Buying and Selling a Home, A Complete Guide," Chronicle Books, San Francisco; 1994. v Common indexes include Treasury Securities (T- Bills), Certificates of Deposit (CDs), and Libor (London inter- bank offering rate). Most metropolitan newspapers publish current ARM index rates.
The interest rate and payment adjustments may or may not be scheduled
to change at the same time. For example, the interest rate on some
plans changes more frequently than the monthly payment, which may
result in negative amortization. "This means that the additional
interest will be added to the principal balance of the loan and may
accrue additional interest itself," Hymer says. If the monthly payments
on an ARM are increasing, generally this is because the index is rising
or it is a negative amortization ARM.
People with adjustable-rate mortgages wanting to know how their
payments are calculated might contact their lender or review the
language in their loan agreement.
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Last Updated ( Wednesday, 30 July 2008 )
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