In these days of staggering credit card interest rates and payment minimums being doubled under the new bankruptcy laws, as a home owner, you may find that loosing equity in your home through a purchase loan refinance may be still be the best way to unload burdensome debts. However, with interest rates steadily rising, you may find that current market rates may be too much for you to afford. If a 7+% 30-year fixed-rate mortgage doesn't fit your budget, a hybrid adjustable rate mortgage (ARM) may be your answer.
"If economic growth slows, the Federal Reserve could begin lowering short-term rates in mid to late 2007," says Doug Duncan, chief economist of the Mortgage Bankers Association, which could be good news for borrowers considering hybrid ARMs for mortgage refinancing.
Hybrid ARMs come in many flavors; the following are some of the most popular:
- 3/1 - fixed rate for the first three years, then annual adjustments.
- 5/1 - fixed rate for the first five years, then annual adjustments.
- 10/1 - fixed rate for the first ten years, then annual adjustments.
There are two other hybrid ARM's tailored for experienced investors and people whose incomes are unstable or temporarily reduced: an interest-only loan where only the interest is paid on the mortgage or a payment option ARM (also known as option ARM, pick-a-payment mortgage and deferred interest loan, among other terms). Option ARMs allow up to four different payment options:
- A minimum payment (negative amortization option).
- An interest-only payment (similar to interest only loans)
- A fully indexed payment (full principal and interest payments)
The interest rate you are quoted is the initial rate you'll pay on your ARM. The fully-indexed rate (FIR)- the margin (which remains fixed for the life of the loan) plus the current rate of one of several prime rate indices, including LIBOR, MTA and COF--is usually the best prediction of the rate at the first rate adjustment. In choosing between two ARMs that are otherwise the same, choose the one with the lowest FIR.
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