Variable-Rate Mortgages -
Refinancing
In a Variable-Rate Mortgage, the
interest rate is fixed for a period of time, after which it will
periodically (annually or monthly) adjust up or down to some market
index. Common indices in the U.S. include the Prime Rate, the LIBOR, and
the Treasury Index ("T-Bill"). Other indexes like 11th District Cost of
Funds Index, COSI, and MTA, are also available but are less popular.
Variable Rate Annuity
Variable-rates transfer part of the interest rate risk from the
lender to the borrower, and thus are widely used where unpredictable
interest rates make fixed rate loans difficult to obtain. Since the risk
is transferred, lenders will usually make the initial interest rate of
the ARM's note anywhere from 0.5% to 2% lower than the average 30-year
fixed rate.
In most scenarios, the savings from a Variable-Rate Mortgage
outweigh its risks, making them an attractive option for people who are
planning to keep a mortgage for ten years or less.
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A common sales pitch
for ARM loans is that the borrower can use those first two years
before the reset to improve his or her credit score and then qualify
for a cheaper prime loan. "But that goal is rarely realized," says
Daniel H. Jacobs, chief executive officer of 1st Metropolitan
Mortgage, Charlotte, N.C. As the housing market cools, it probably
will get harder for marginal borrowers to refinance on attractive
terms, he notes, adding: "At some point, people are going to have to
pay the piper." |
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