Consumer Handbook on Adjustable Rate Mortgages

Index

The index is the measure of interest rate changes that the t the lender uses to decide how much the interest rate on an ARM will change over time. No one can be sure when an index rate will go u or down. To help you get an idea of how to compare different indexes, the following chart shows a few common indexes over a ten-year period (1977-87). As you can see, some index rates tend to be higher than others, and some more volatile. (But if a lender bases interest rate adjustments on the average value of an index over time, your interest rate would not be as volatile.) You should ask your lender how the index for any ARM you are considering has changed in recent years, and where it is reported.

Margin The number of percentage points the lender adds to the index index rate to calculate the ARM interest rate at each adjustment. Negative Amortization

Amortization means that monthly payments are large enough to gh to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover al of the interest cost. The interest cost that isn't covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

Points

A point is equal to one percent of the principal amount of your your mortgage. For example, if you get a mortgage for $65,000, one point means you pay $650 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

MORTGAGE CHECKLIST

Ask your lender to help fill out this checklist. list. Mortgage A Mortgage B Mortgage amount