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Do the recent housing industry horror stories keep you up nights? Feeling squeezed by an adjustable-rate mortgage reset that could turn your happy home into a house of debt? Wondering what would happen if your mortgage company went bankrupt?
Don't panic. Bankrate's got the information on today's most pressing mortgage questions, including moves you can make right now to keep your home financially secure.
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What is a rate reset? |
Typically, when rates have risen during the introductory
period, the first reset can be steep. That's because not only does
your index,
which determines your interest rate, reset upward to reflect current
interest rates, but for the first time, your mortgage company tacks
on its margin,
an extra percentage point or two for them.
Both index and margin components then continue for
the term
of the loan.
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How do I know if my rate will reset? |
If you hold an adjustable-rate mortgage, or ARM, your
rate will reset by definition on one or more "change dates,"
with the largest hike coming at the end of an introductory or "teaser"
rate period of anywhere between one month and 10 years.
For instance, a 3/1 ARM will reset after the first three years, a 5/1 ARM after the first five years and so on.
Although an ARM typically will continue to reset, often annually, after that initial hit, the yearly increases, also defined by contract, aren't likely to sting as much as the first reset. Your mortgage company may notify you prior to the reset and/or send new payment coupons reflecting your new monthly mortgage payment.
Don't know if you have an ARM? Find
out.
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How much will my rate reset? |
The amount of your rate reset as defined by your mortgage
contract is a factor of three components -- the index, the margin
and the limit, or "cap."
The index, as its name implies, is based on the interest
rate or bond yields in other markets. Typical indexes used in ARMs
include a handful of acronyms: COFI (cost of funds index, based
on Western U.S. banks), MTA (monthly Treasury average of one-year
Treasury bills), LIBOR (London Interbank Offered Rate, the wholesale
bank money market rate in London) and CMT (constant maturity Treasury
bill average).
The margin is an additional percentage that your mortgage
company charges for its service.
The cap places limits on the maximum percentage your mortgage rate can be raised in a given period. Typically, an ARM will limit the initial reset, subsequent annual resets (periodic cap) and the maximum (lifetime cap) increase for the term of the loan.
When your mortgage "change date" arrives, your rate will adjust to the index interest rate on that day, plus an additional margin percentage as specified in your mortgage.
For instance, let's say you have a 3/1 ARM at an introductory
rate of 5 percent. The index interest rate on your mortgage has
risen to 7.5 percent after three years and the margin rate in your
contract is 1.5 percent. Starting in the fourth year, your 5 percent
ARM would reset to 7.5 percent with a 1.5 percent margin, for a
new mortgage rate of 9 percent.
Confused? Walk through our ARM contract primer to help clarify your own mortgage. |
