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Unformatted text preview: ain current about what the different lenders are offering in the market. Mortgage brokers specialize in being current about the market. Remember, also, that the 2% rule is only a “rule of thumb” and may not be the best guide in all situations. ESCAPING AN ARM
GREATER RISK – The adjustable rate mortgage evolved from lenders' efforts to create mortgage instruments in which the borrowers would accept at least a part of the risk that interest rates might rise to levels higher than extant at the time the loan is negotiated. Lenders had been “burned” in the early 1980s when, in order to attract deposits, they had to pay interest rates on deposits higher than the rates received on existing loans, lower interest rates were offered to borrowers
15-2 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 15: REFINANCING OR NOT AND CHOOSING A LENDER
who would accept the risk of higher interest rates in the future by accepting variable or adjustable interest rate provisions. These loans were made even more attractive to borrowers by offering “teaser” rates for a very short term, usually until the first adjustment period. The ultimate inducement, then, was to qualify the prospective borrower on the basis of the teaser rate, enabling the buyer/borrower to qualify for a much larger loan and thus a much higher priced home. REDUCING RISKS – Property owners encumbered with ARM loans can reduce that added risk they have assumed by refinancing with a new fixed–rate loan. Clearly this procedure is most attractive at a time when market fixed rates are relatively low. Some economists suggest that 7% plus the projected rate of inflation is an attractive fixed–rate interest. TAX–FREE CASH
INCREASED EQUITY –The appreciation rate in real property values in California has been generally greater than the overall inflation rate. Homeowners who have owned their homes for several years usually find that their equities have increased enormously. It is not unusual for an owner who pai...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10