My Personal Finance Journey

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Bankrate.com Makes Adjustable Rate Mortgage Search More Powerful

Contributed by mm | March 3, 2005 8:49 PM PST

I'll be always grateful to Bankrate.com for helping me fetch a great refinancing deal last year. Without Bankrate, there would be no way I could lock the bottom-low rate of 3.50% for a 5/1 adjustable rate mortgage (ARM) -- I believe the rate only survived less than 48 hours. Even today, I still consider my refinancing a huge success on timing and execution. (Actually I ran three posts to discuss the ins and outs last year: see Part 1, Part 2 and Part 3).

Bankrate recently upgraded its ARM search and provided more information to help consumers to make the right decision. Previously, the only available information is interest rate, APR and length of lock. (For adjustable rate mortgages, rate is often different from APR and here is why.)

Checking out Bankrate's result on 5/1 ARM available to the Greater Seattle region -- Bankrate now includes three more columns of "caps" ("first", "additional" and "lifetime"). In ARM terms, "cap" refers to how fast your rate can move. For 5/1 ARMs, in which your rate is locked for the first five years, then readjusted every year thereafter, "initial cap" represents how much your initial rate can go up at the end of the 5th year; "additional cap" represents how much your rate can be adjusted upwards every year thereafter. "Lifetime cap" puts a limit on how much your rate can increase from your initial rate throughout the lifetime of your mortgage. The most typical caps arrangement is 5/2/5, which means if your initial rate is 4.50%, your rate during the lifetime will never be higher than 9.50%; it can only rise by 5.00% during the first adjustment and no more than 2.00% in subsequent annual adjustments.

So, with so many numbers, how should one choose the right ARM product? Here are the rules of thumb:

- If you intend to switch to a new house before the end of the initial fixed rate period (five years in terms if you are looking at 5/1 ARM products), always choose the lowest RATE.

- If you intend to move within 5 years after the initial fixed rate period, consider the average of RATE and APR. Barring significant RATE and APR variance, consider the product with the lower first and additional cap.

- If you intend to stay longer than that, focus on APR. Of course, for products with very close APR, consider lower caps.

Of course, do take these advices with a grain of salt. Picking the right mortgage product often requires a hard lock of one's individual financial status, and you will not regret to crunch some numbers before your make up your mind.

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