December 07, 2001
By: Bev Dodd
Home loan: Low rates, easy terms
Think about interest rates fluctuating on a adjustable rate home loan. You can also think about temporary buy downs with a home loan. We'll discuss this more below.
What is an Adjustable Rate Mortgages With Hidden Margins? In simple terms it's just a home loan that does not have a fixed rate of interest. The interest fluctuates based on changes in the market index. Some lenders will use large margins to inflate the variable interest rate. Depending on its size, the margin can raise the interest rate and cause the subsequent home loan monthly payment to rise in a very short period of time.
Temporary buy downs usually refer to a borrower buying down the interest rate on a home loan. This is the same concept as paying points on a loan, except that points buy down (or up) the rate of a loan over the entire term while a buy down is usually only a temporary reduction for your home loan.
If you plan on staying in the property for at least a few years, paying discount points to lower the loan's interest rate can be a good way to lower your required monthly home loan payment (and possibly increase the loan amount that you can afford to borrow). If you only plan to stay in the property for a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid up-front for your home loan.
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