• The Comeback of the Adjustable-Rate Mortgage

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    First Citizens Federal Credit Union
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    First Citizens Federal Credit Union

    Adjustable-rate mortgages, also known as ARMs or variable-rate loans, have been out of favor with many people in recent years because of the low fixed rate interest-rate environment and the perception that rising payments on deep discounted ARMs contributed to foreclosures during the recent financial crisis.

    But with new federal disclosures and protections for consumers, some borrowers are wondering if they should consider an ARM if the initial interest rate is significantly lower than what’s being offered for a 30-year fixed-rate loan. Here are ideas to keep in mind when choosing between the two types of loans.

    Decide how long you plan to be in the home.

    In general, borrowers who are certain they will move out of a home within a few years are more likely to benefit from a low-rate ARM than those who plan to stay in the home for as many as 30 years. “Because it’s difficult to predict the future, seriously consider what could happen if you agree to an ARM and then stay in the home much longer than you expected

    Remember that the features of adjustable-rate mortgages can differ considerably so it pays to comparison shop.

    For example, some ARMs may have a fixed rate for 7 years before the interest rate could “reset” (change) and do so again every year thereafter. Other ARMs may start to reset after three years. The maximum rate increases, both periodic as well as during the life of the loan, also can vary significantly between lenders and loan products.

    In addition, the initial rate on an ARM may be “discounted” — to make it more attractive to you — and that means your payments are very likely to increase substantially beginning with the first reset period.

    Ask yourself the question ” Are there caps in place that will maximize the amount that your interest rate and payment can be increased to at the time of your first and subsequent resets and can you manage those increased payments? First Citizens’ FCU Loan Officers will advise and compare Fixed Rate VS Adjustable Rate payment to help you decide what works best for you

    Be comfortable that you’ll be able to make your loan payments on an ARM if the interest rate soars to the highest level it could go while you own the home. 

    The lender must disclose to you both the maximum interest rates and the resulting payments for an ARM within three business days of receiving your complete application.

    Factor in the possibility that your income may not increase at the same level as the mortgage payment. Also, know that your property taxes and insurance likely will increase periodically. And don’t assume that you will have the option to refinance the loan or sell your home to escape higher payments down the road.

    For example, given the low mortgage interest rates over the past few years it is reasonable to expect higher rates in the future, and that could mean refinancing your ARM may not significantly lower your payments.

    Carefully review the disclosures from your lender and ask for help if you don’t understand something.

    Make sure that each disclosure reflects the terms you saw advertised or the lender quoted before you applied. Also keep these disclosures and compare them to the loan agreement you receive before you go to closing.

    If you are uncertain as to what your future plans are the stability of a fixed-rate mortgage, may be the best alternative.

    First Citizens offers very competitive rates on all their loan products. In today’s environment, mortgage rates are still near or at historical lows and a fixed rate mortgage loan may still be the best choice to make for many new homebuyers. First Citizens’ offers fixed rate mortgages at terms from 10 to 30 years.

    If you plan to stay in the home for the long-term, you also could consider paying the mortgage lender some “points” at closing. Each point equals one percent of the loan amount, and it is a fee to lower the interest rate on the loan. A First Citizens’ Loan Officer can calculate the savings over the life of the loan to determine if paying points to lower your rate is in your best interest.



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    May 21, 2014