The Skinny on adjustable Rate Mortgages – Part 3

Nov 13th, 2007 @ 1:06 PM by MortgageMentor

In part one of this series, we discussed ARMs, how they vary, and the downside of getting one. In part 2, we talked about adjustment periods and indexes. Today, let’s look at the rate caps and payment caps.

Rate Caps 

Rate caps limit how much interest the lender can charge you. There are two main kinds of caps that might be used on ARMs:

• A Periodic Cap limits how much your rate is allowed to increase from one adjustment period to the next.
• A Lifetime Cap limits how much the interest rate can change over the entire life of the loan. By law, there must be an overall (lifetime) cap on your adjustable rate mortgage.

Note that if your interest rate is held down by means of a cap, even though the index went up, the lender may be able to impose the increase at the end of the next adjustment period. For example, if your cap is 2%, but the index rose 3%, the lender may be able to raise your rate 2% during this adjustment period and the extra 1% during the next one.

 Payment caps

These are limits on how much your monthly payment can go up at the end of each adjustment period. Usually if your ARM has a periodic rate cap, it will not have a payment cap.

Dizzy yet?

The reason all these caps are so important to consider when getting a loan is the way that your monthly payment will increase — directly affecting the amount of money you have on hand each month. 7 percent may not sound like a lot of money, but if your monthly payment jumps from $953 to $1395 over the first seven years of the loan, that is nearly a 50% increase.

 Get Assistance

If you still aren’t sure about your ARM program, get a written disclosure from your lender. Compare the annual percentage rates on several ARMs and try to see which one will cost you less money. You might also consult a financial advisor or the US Department of Housing and Urban Development’s website about Buying a Home: http://www.hud.gov/buying/index.cfm

One Response to “The Skinny on adjustable Rate Mortgages – Part 3”

1. max says:

   November 15, 2007 at 7:45 pm

   Good article! Thanks
   max
   http://www.nycmortgage.us