Understanding adjustable rate mortgage terms

There are so many mortgage products on the market today that it can be confusing. For example, one option is an adjustable rate mortgage (ARM). Here are some terms you may encounter that can help you decide if an ARM is the best product for your needs:

• Adjustable rate: A rate that fluctuates in relation to an index, depending on conditions in the market. Adjustable rate mortgages usually have a lower interest rate than a fixed rate mortgage to begin with, but carry the risk that their rates may go up later.

• Adjustment period: With most ARMs, the period when they can be adjusted occurs every one, three or five years. This is the time when your interest rate and monthly payment may change.

• Appraisal: A written analysis of the estimated value of a property, as prepared by a qualified appraiser. If your home is appraised for less than the amount you want to borrow, you may have trouble qualifying for your mortgage.

• Closing costs: For an adjustable rate mortgage, as with any mortgage, you may have to pay closing costs. This term refers to the money paid at closing to the lender. It includes a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The closing costs are usually about 2 percent to 6 percent of the mortgage amount.

• Credit report: A report of your credit history that a lender uses to determine your creditworthiness. It shows your history of borrowing and repaying money.

• Interest rate: The annual interest on a loan, based on a percentage of 100. The lower your interest rate, the lower your monthly payment.

• Lock-in: A guarantee from a lender that you will be granted a certain interest rate on a mortgage for a specific time period, such as thirty days prior to closing.

• Mortgage refinancing: You may choose to refinance an ARM before the end of the term when a higher rate may kick in. This involves taking out a new mortgage to pay off your existing mortgage. In deciding whether to refinance, you need to consider the costs involved, interest rate trends and your financial situation.

• Origination fee: This term refers to the fee charged by a lender for processing a loan.

• Pre-approval: Getting pre-approved for a mortgage requires that you complete a mortgage application and supply a lender with all the necessary documentation to check your financial background and credit rating. You will then be told the exact mortgage amount for which you are approved.

• Pre-qualification: Occurs when a lender estimates what size loan, usually a mortgage, you can afford. A prequalification estimate is non-binding.

• Principal: The amount of debt, not counting interest, left on a loan.

• Term: The time period for your loan.

• Title: The document that shows ownership of the property.


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