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Simply put, an adjustable rate mortgage is one where your monthly mortgage payment can change over the length of the loan term, known as amortization terms.
The loan may have a total term of 30-years, but along that timeframe, the payment amount can vary - hence "adjustable".
These loans can be great options for the right person, and can also be the wrong options. Let's dig a bit deeper on adjustable loans, the loan terminology you need to understand, and how they can adjust.
Since the rates are lower adjustable rate loans are easier to qualify for. Often, for the first time buyer, they are the only alternative.
There are several parameters regarding variable rate loans:
SOFR - PROPER NAME: Secure Overnight Financing Rate. - In late 2020, for a wide variety of reasons, the SOFR index has become the popular index for long-term home mortgage loans. This index is published by the Federal Reserve Bank of New York.
1 Year T-Bill
PROPER NAME: Yield on Treasury Security Adjusted to a Constant Maturity of One Year
The One-Year Treasury Security index (or "T-Sec") is associated with ARMs that feature annual rate adjustments. It is calculated by the
Federal Reserve Board and has both a weekly and monthly value; most lenders use the weekly value. This index reflects the state of the economy, and responds quickly to economic changes.
Confusion can arise when some lenders use the term "one year Treasury bill." Most one-year ARMs -- but not all -- are tied to the Constant Maturity of the One Year Treasury Security.
If you have a loan you are interested in refinancing you can generally find the details (Index, Margin and life cap) by looking in paragraph #4 of the "Adjustable Rate Note" or "Adjustable Rate Rider". This will be with the papers you received from the escrow company.
LIBOR
Stands for London Interbank Offered Rate. It is a measure of commercial lending rates of a group of London banks. It is similar to Prime. It moved up and down rapidly. It can best be obtained daily from the Wall Street Journal.
6 Mos. CD
This is a measure of what banks are paying on 6 month certificates of deposit. It moves less rapidly than LIBOR or T-bill but more rapidly than COFI.
COFI or 11th District Cost of Funds. (not very common)
PROPER NAME: Monthly Weighted Average Cost of Funds for 11th District SAIF-Insured Institutions.
This index, used primarily for ARMs with monthly interest rate adjustments, is calculated by the Federal Home Loan Bank of San Francisco. The 11th District represents the SAIF-insured savings institutions (savings & loan associations and savings banks) in Arizona, California and Nevada.
The cost of funds reflects the interest rates paid by institutions for savings accounts, FHLB advances, money borrowed from commercial banks, and other sources.
Since the largest part of a cost of funds index is interest paid on savings accounts, this index lags behind the economy. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general. However, such ARMs often have payment caps, but no month-to-month interest rate caps.
Getting your home loan with Cambria Mortgage? You can call us at (651) 552-3681 to find out the current index. Otherwise, the current index for adjustable loans is readily available from multiple sources online.
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Equal Housing Lender. The Joe Metzler Team at Cambria Mortgage lends in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Colorado, and Florida only. This is not an offer to lend or to extend credit, nor is this a guaranty of loan approval or commitment to lend. Information here can become out of date, and may no longer be accurate. Products and interest rates are subject to change at any time due to changing market conditions. Not all programs available in all states. Actual rates available to you may vary based upon a number of factors. Consumers must independently verify the accuracy and currency of available mortgage programs. All loan approvals are subject to the borrower(s) satisfying all underwriting guidelines and loan approval conditions and providing an acceptable property, appraisal and title report. Joe Metzler, NMLS 274132, Cambria Mortgage NMLS 322798. © 1998 - 2024.