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A 1 year Adjustable Rate Mortgage
usually offers the lowest start
rate for any adjustable mortgage
other than a Libor or a Cofi arm.
So as far as standard products are
concern it may be the lowest rate
available to qualify for a home
loan. But this comes at a price.
The norm for most 1 year arm mortgage
loans is a fast adjustment period.
You only have one year of fixed,
so in theory the loan has very little
chance for the investor to not be
moving in conjunction with market
conditions. Since it can adjust
so fast, unlike most other adjustable
mortgage loans, you may have to
qualify on the second years maximum
interest rate. Even though there
is no guarantee that the rate will
be that high at adjustment. This
is because the underwriters have
to assume the "worst case"
that the market will cause the rate
to go up.
An
example of a 1 year adjustable
rate mortgage with a start rate
of 2.5% with a margin of 2.75%
and the caps are as followed 2/2/5.
Even though the start interest rate is
2.5% the rate used to qualify the
borrower for the loan amount desired
is 4.5% this was from adding the
start rate and the max adjustment. (2.5%
plus the max first year adjustment
of 2%). Remember the margin is not
the max adjustment it is what is
added to the feds 1 year fund rate
to get the current rate which cannot
exceed the cap.
This
product is great for borrowers who
know they are either not going to
stay in the home long or believe
they will make more income in the
near future and can afford a higher
payment then and not now. Why. Well
imagine the 30 year fixed rate mortgages
are at 6% and the 1 year arm is
at a start rate of 2.5% the yearly
cap is 2 percentage points and the
lifetime cap is 5. So, if the feds
fund rate is high and ,moving higher
when the loan goes to adjust the
one year arm mortgage can move up
to 4.5% the second year and 6.5%
the third year but can never go
over 7.5% (because it hits its cap
2.5% + 5% = 7.5%). So a basic view
is that by getting the 1 year arm
you are guaranteed a better return
than the 30 year fixed the first
two years in the home and a close
return in the third year. Never
a possibility of going 1.5% over
the 30 year fixed rate that was
offered at 6%
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