ARMs and Mortgage Calculators in Detail

Mortgage calculators used to calculate adjustable rate mortgages are perhaps one of the most valuable mortgage calculators.  The primary reason why mortgage calculators employed for adjustable rate mortgage analysis have such great value is not that these mortgage calculators have some super attributes but it is too many borrowers rush into adjustable rate mortgages without truly understanding the advantages and disadvantages of these loans.  The adjustable rate mortgage calculator can force these potential borrowers to evaluate the true terms of the loan they may be considering and potential changes in payments and rates that are unique to the structure of the adjustable rate mortgage.

Most borrowers who take adjustable rate mortgages use them to qualify for the loan they want.  Since the initial rate on adjustable rate mortgages is usually lower than the rate on fixed rate mortgages, these borrowers can qualify for a larger home, a larger amount of cash back on a cash out refinance or even a larger loan for debt consolidation.  During high mortgage interest rate environments, more borrowers qualify for adjustable rate mortgages than fixed rate mortgages because the rate difference between the two products generally widens.  One of the first considerations when using a mortgage calculator for these loans is to plug in the rates for an adjustable rate mortgage and a fixed rate mortgage to determine the initial rate and payment difference for the differing products.

Unfortunately there is a large group of adjustable rate mortgage borrowers who simply do not understand how they work and end up with an adjustable rate mortgage loan do to ignorance rather than informed choice.  The use of mortgage calculators is all about making informed choices.  With adjustable rate mortgages, sometimes understanding the terms and operations of these loans can be challenging.

The key components for most adjustable rate mortgages, components that should be entered into a mortgage calculator to calculate payments, amortization schedules and to run scenarios for future payment changes include;

The initial interest rate.   This is the start interest rate or the rate that is quoted on an ARM.
The index to which your ARM rate is tied.  This may be a the one year U.S. treasury note rate, COFI or cost of funds index, the prime rate or other widely followed indexes.
The margin that is added to the index on rate adjustment dates to determine the new rate.
The time period for which the initial interest rate holds and the periods at which time the interest rate can adjust up or down.
The periodic rate adjustment cap limiting the size interest rate adjustments.
The maximum interest rate cap over the life of the loan.
If the loan has payment limiting caps and possible negative amortization, the following conditions need to be evaluated as well:
The payment adjustment cap.  Limiting not the rate adjustment but the amount the payment can change.
The negative amortization cap.  Adjustable rate mortgages that allow negative amortization, generally limit the total amount of negative amortization and how long it can last.  Most adjustable rate mortgages set a cap on the loan balance with negative amortization as a percent of the original balance, ranging from 110% or 115%.

Before these conditions can be entered into a mortgage calculator two important aspects of these loans should be understood thoroughly.  During the start period of an adjustable rate mortgage, the rate is fixed until the first adjustment period.  The initial period for the start rate lasts from one month on a one month ARM to 7 years on a 7 year ARM.  A vitally important interest rate for the borrower to be aware of is not just this mortgage interest rate but what is referred to as the current fully indexed rate.  This is the interest rate based on the value of the rate index plus the margin.  Though this interest rate does not apply now, it makes the borrower aware that this is what the rate would be at the first adjustment period if interest rates do not change from their present levels.  

With all these conditions and variables it becomes apparent just how important mortgage calculators can be in assessing the value of these loans.  Without thorough understanding of the terms it is difficult to fully comprehend the input values in an adjustable rate mortgage payment calculator.  With all the possible changes in an adjustable rate mortgage it may also be of value to utilize a mortgage calculator to compute various amortization possibilities.  And finally when trying to use a qualifying mortgage calculator it is crucial to know what parameters to keep a watch on.  Mortgage calculators are invaluable at quickly assess changing conditions, the foundation of the adjustable rate mortgage.

This entry was posted on Friday, December 12th, 2008 at 8:52 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.