I heard the news about another interest rate hike and thought it was about time to watch into refinancing my mortgage. I communicated my mortgage company first.

“I am fascinated in a fixed mortgage rate.” I said.

“May I ask why that is?” The broker asked respectfully.

“I don’t want to deal with the threat of rising[/.spin] interest rates. At my age, I cannot afford the risk.”

“[spin]Watching at your last ten years of record, you have done pretty well with the adjustable rate. Actually, you had paid less in interest than most people with a fixed loan. May I propose that we look at several adjustable rates, which are even less than the rate you’re settling and with caps you don’t have to concern about the interest rate hikes. I think we can save you a few hundred dollars off your monthly payment.”

At this point the broker took a pause so that I can say, “No thank you. I am only interested in a fixed rate mortgages.” “I don’t understand. Are you not interested in saving money?” He asked before initiating into a sermon that had a mix of economy 101, budgeting 1, a dash of fortune telling and a healthy and entirely unrealistic optimism of future trend in interest rates.

When he was finished I explained to him that I remember the 18%-19% interest on mortgage loans in the early 1980′s that he appeared too young to remember. I pointed out that on a $100,000 loan, the 18% interest is $1,500 per month on the mortgage interest alone. If you have a $200,000 loan the interest alone would be a back-breaking payment of $3,000 per month.

I understood he thought I am out of my mind thinking about an 18% mortgage interest rate in today’s environment. Towards the end we ended the phone conversation without any answer. The breach in understanding wasn’t about fixed rate mortgages vs adjustable rate mortgages (ARM). The gap was in age, experience, expectation, hopes and fears; a gap too wide to bridge.

To comprehend this gap, let’s look at the adjustable rate mortgages. This type of mortgage loan is usually lower than the fixed rate and the lower rate implies lower payment that in turn means easier qualification.

When loaners are considering your mortgage loan application, they look at what percentage of your income is available for settling their loan. With an income of $5,000 per month, a $2,000 loan payment is 40% of your income and a $1,000 payment is 20% of your income. The nearer you get to $1,000 or 20% of your income, the easier it is to be eligible for the loan. This easier qualification attractcs to younger people who are just commencing and those with income limitation.

Adjustable mortgage rates appeal to young people with an innate optimism, hopes of increased income and the high likelihood of moving to a different home in a short period of time. In search of advice from mortgage professionals like Edmonton Mortgage they require to look at what they can afford to settle and cannot worry too much about the distant future. To them everything is better than renting which is an absolute waste of money.

There are also those older persons who have suffered from some set back in life and do not enjoy a high credit score or do not have a very high income. Since a poor credit score rises the interest rate a bank offers to potential borrowers, a fixed rate may be too high for these individuals to consider.

Let’s take a look at some terms that help you understand ARM better. Other option is to seek an advise from experts like Edmonton Mortgage.

Margin – This is the lender’s markup and where they make their profits. The margin is added to the index rate to determine your total interest rate.

ARM Indexes – These are benchmarks that loaners use to find out how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. Deliberateboth the index and the margin when you are shopping around.

Adjustment Period – Relates to the holding period in which your interest rate will not change. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.

Interest Rate Caps – This is the utmost interest a lender can charge you.

Periodic caps – The lenders may limit how much they can increase your loan within an adjustment period. Not all ARMs have periodic rate caps.

Overall caps- Mortgage lenders may also limit how much the interest rate can add to over the span of the loan. Overall caps have been obligedby law since 1987. Payment Caps – The maximum amount your monthly payment can increase at each adjustment.

Negative Amortization – In most situations a portion of your payment goes toward paying down the principal and lessening your total debt. But when the sum is not enough to even cover the interest due, the overdue amount is added back to the loan and your total mortgage loan obligation is amplified. In short, if this persists you may owe more than you started with.

Negative amortization is the probable downside of the payment cap that sets aside monthly payments from covering the cost of interest.

As you contrast lenders, loans and rates remember Henry Moore who said, “What’s important is finding out what works for you.”

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