Consumer Handbook on Adjustable Rate Mortgages

Both lenders use the one-year Treasury index. But the first irst lender uses a 2% margin, and the second lender uses a 3% margin. Here is how that difference in margin would affect your initial monthl payment.

In comparing ARMs, look at both the index and margin for each pla plan. Some indexes have higher average values, but they are usually used with lower margins. Be sure to discuss the margin with your lender.

CONSUMER CAUTIONS

Discounts

Some lenders offer initial ARM rates that are lower than the n the sum of the index and the margin. Such rates, called discounted rates, are often combined with large initial loan fees ("points") and with much higher interest rates after the discount expires. Very large discounts are often arranged by the seller. The The seller pays an amount to the lender so the lender can give you a lower rate and lower payments early in the mortgage term. This arrangement is referred to as a "seller buydown." The seller may increase the sales price of the home to cover the cost of the buydown.

A lender may use a low initial rate to decide whether to r to approve your loan, based on your ability to afford it. You should be careful to consider whether you will be able to afford payments in later years when the discount expires and the rate is adjusted. Here is how a discount might work. Let's assume the one-year ARM ARM rate (index rate plus margin) is at 10%. But your lender is offering an 8% rate for the first year. With the 8% rate, your first year monthly payment would be $476.95.

But don't forget that with a discounted ARM, your low initial pay payment will probably not remain low for long, and that any savings during the discount period may be made up during the life of the mortgage or be included in the price of the house. In fact, if you buy a home using this kind of loan, you run the risk of...

Payment Shock

Payment shock may occur if your mortgage payment rises very shar sharply at the first adjustment. Let's see what happens in the second year with your discounted 8% ARM.