Determining Rates

The adjustable rate mortgage is a type of loan which will be secured on a home which has an interest rate and monthly payment that will vary. The adjustable rate will transfer a portion of the interest rate from the creditor to the homeowner. The adjustable rate mortgage will often be used in situations where fixed rate loans are hard to acquire. While the borrower will be at an advantage if the interest rate falls, they will be at a disadvantage if it rises. In places like the United Kingdom, this is a very common type of mortgage, while it is not popular in other countries.

Before you can decide just how much house you can afford to purchase, you need to look at an overall summary of mortgage fees so that you will have a clear understanding of all the expenses involved. Many factors can impact the total amount of money you need to borrow, as well as the final out-of-pocket requirement for your monthly payment. Down Payment:Most home buyers will be required to make a down payment in order to be considered for mortgage loan approval. The amount of money an individual is required to put down may vary significantly based on a variety of factors, including: the cost of the home, the applicant's credit history, the borrower's qualification for down payment assistance programs, and many other variables. Typically, home buyers are required to make down payments ranging from five to 20 percent of the home's purchase price.Prepaid Interest:The day you close on your home loan, you will be required to pay the interest that will accrue on the loan between the current time and the day the first monthly payment is due. Prepaying interest allows you to exert some degree of control over the due date for your monthly payments. Many people are able to include the initial prepaid interest in the total amount financed, which keeps them from having to pay this amount out of pocket at the closing table. Keep in mind that the longer you put off your first payment, the more prepaid interest you will have to pay at the time of closing. It makes sense to utilize prepaid interest to make sure that your payment due date is convenient to your income schedule, but there is no benefit to postponing the first payment simply because you are allowed to do so.Homeowners Insurance:When you finance a home, the premium for your first year of homeowners' insurance coverage is due at the closing table. No mortgage company will allow a sales transaction to take place without being certain that insurance coverage is in effect the moment the title transfers into the mortgagee's name. As with prepaid interest, many home buyers who are able to do so elect to include their initial homeowners insurance premiums in the total amount financed.

Why Indexes MatterIndexes matter because they set the base of the interest rates charged on your loan. Assume you apply for an adjustable rate mortgage based on a LIBOR index. Assume the LIBOR rate is 2.2 percent when you apply. The 2.2 percent is your starting interest rate. If the LIBOR shoots up one percent in eight months, your loan will do the same.

Importantly, the index rate used for your loan is not the interest rate you will pay. Instead, you have to add the banks margin on top of the index rate. Most banks will charge two to three percent on top of the index rate. Using our LIBOR example, the initial interest rate of your loan would be 2.2 percent plus whatever the bank is using as a spread. Obviously, this means you need to closely read the loan documents to figure out how the game is being played!