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Old 02-02-2008, 12:36 PM   #21
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There is also a "margin" that is added to the specific index that is used on the loan documents to determine the reset of the payment on an Adjustable Rate Mortgage (ARM). Usually this margin is between 2% and 5%. The one month LIBOR, index is now at about 3.27% (there are many other indexes that may also be used). If you add a margin of say, 3% this would give an interest rate of 6.27%. However, ARMs also offer protection in terms of a "cap", which might perhaps be 3% on the first reset. In the above example, the resulting interest rate would still be 6.27%. For further protection the lender may also offer an annual cap on second and subsequent resets of perhaps 2%. If the LIBOR should go to 6.14% a year later, the margin plus index would give a reset of 9.14%. However since their is a cap of 2% on the second and subsequent resets, the most the interest on the payment would be 8.27%, because the index plus margin cannot increase more than the 2% cap. There is also a "lifetime cap" of usually 6%, which means the interest rate can never get higher than the one year LIBOR at the close of escrow (not the teaser rate). Many loans also have negative amortization, meaning your payment may not cover all of the interest. In this situation, the loan amount may increase as opposed to a fixed rate mortage that is fully amoritized with the principal decreasing with each payment. If you're still reading this post, personally, I would stay away from ARMs. Unless, this is the only loan you can qualify or you know you'll be moving in a few years. DW and I took out a subprime ARM in 2004, because we were positive we would be selling our home in 2006. We then pocketed the savings in interest and banked it. The link below will take you to an ARM reset calculator at BankRate.com.

Mortgage reset calculator: Get your new ARM payment and rate
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Old 02-02-2008, 02:49 PM   #22
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I wasn't thinking about my mortgage specifically (I paid mine off), I was thinking about the economic impact of the Fed's big rate cuts. We've been hearing that lots of people are going to be in trouble when their ARMs reset. The rates I see seem to have dropped so quickly that some people will discover that the feared reset actually results in a lower monthly payment.

I checked some payment amounts with a 3% margin. A 30 year amortizing $200,000 mortgage indexed to 3-year treasuries plus a margin of 3.00% would have had a monthly payment of $1,235 when originated in Feb 2005. Last July, the borrower was thinking that the reset in Feb 2008 might push the payment up to $1,410. In fact, because rates have come down so sharply, the reset could drop the payment to $1,094.

It looks like the Fed really did this borrower a favor.

I think of a "teaser" as just an unrealistically low margin in the first period - something like 1.00% which will be replaced by 3.00% at the first reset. For my one case, that would have made the payments for the first 3 years $998 instead of $1,235. That case would have reset to $1,389 using last July's interest rates - a pretty big step.
But with the new rates, the payment only goes up to $1,078. That's a step that's smaller than people should have expected.

I suppose there are 5.00% teasers out there with no amortization. Those people are going to see big increases.

My conclusion from this one data point is that the problem is "teaser" rates and "negative amortization" more than ARMs in general. The Fed has pushed rates so far down that anyone who's seeing big increases on a reset now is probably someone who signed up for an original deal that should have failed the "if it's to good to be true .... " test.
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Old 02-02-2008, 04:57 PM   #23
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Still don't understand

Sorry I am pretty obtuse in this regard...If mortgage interest rates have little to do with the fed rate cuts, why did mortgage interest rates drop so much 1+ week ago, almost the same time as the fed rate cut? Was it a pure coincidence? Or was the 10-year treasury bill rate somehow remotely related to the short-term rate, although not directly?

Thanks in advance for your enlightenment.
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Old 02-02-2008, 05:04 PM   #24
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They are related in an odd way. The 10-year yield was pushed down due to fear and a flight to safety. The fed lowered the fed funds rate to alleviate that fear. So, the 10-year yield actually went up right after the fed lowered short-term rates.

So, if you want lower fixed rate mortgages, fear is good. Fed cuts are bad. High inflation expectations would also be bad, and inflation expectations sometimes go up in response to fed cuts.
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Old 02-02-2008, 05:40 PM   #25
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Maybe I should wait for the recession to be in full swing before I refinance...(are we already? Seems like nobody knows!)

Thanks for the explanation!
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Old 02-04-2008, 11:31 PM   #26
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i was eyeballing some rates at my bank and all 1st mortgages went up .5% today
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Old 02-05-2008, 03:24 AM   #27
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Maybe I should wait for the recession to be in full swing before I refinance...(are we already? Seems like nobody knows!)

Thanks for the explanation!
no guarantee we will have a recession , if we arent already in one and no guarantee long term rates will fall in one with the fear of future inflation being what it is, timing the stock market is hard enough but predicting interest rates is near impossible
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Old 02-05-2008, 06:49 AM   #28
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Following the additional rate cut, 15yr fixed down 1/4 to 5.0% today at PenFed

But as previously pointed out elsewhere, probably more tied to the 10yr treasury that is also down a bit
Hehehe. Just prior to the second rate cut (and after that sudden .75% rate cut from Uncle Ben), we locked in a rate of 4.625% on a 15 year. We dropped down from a 5.5% primary & 6.99% secondary to a single 4.625%.
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Old 02-05-2008, 06:56 AM   #29
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Maybe I should wait for the recession to be in full swing before I refinance...(are we already? Seems like nobody knows!)

Thanks for the explanation!
My belief is that we are already in a recession. I don't think they define us as having been in a recession until quite a few years have passed (i.e. does anyone remember the 2001 recession?). Weren't they saying, "We have to do this/that in order to prevent a recession" back then?
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Old 02-05-2008, 09:19 AM   #30
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I think we are in a recession as well. It's not looking good right now for everyone who has mortgage payments right now. I just think they aren't making educated decisions and learning from history to change the countries economic problems right now
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Old 02-05-2008, 09:22 AM   #31
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It's not looking good right now for everyone who has mortgage payments right now. I just think they aren't making educated decisions and learning from history to change the countries economic problems right now
:confused::confused::confused:

I've seen some complicated tinfoil hattery, but this is a new one: apparent nonsequiturs with no elaboration.
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Old 02-05-2008, 09:58 AM   #32
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I think we are in a recession as well. It's not looking good right now for everyone who has mortgage payments right now. I just think they aren't making educated decisions and learning from history to change the countries economic problems right now
Well, not everyone with a mortgage is an idiot. Only those that took out ARMs with the thought or hope that the house would appreciate far beyond what they paid for it.
We have a 15 year fixed @ 4.625%. Aside from a vehicle loan (which will be paid off within 6 months), we have no other debt. I'd rather not have a mortgage, but we also need to have a place for our family to live. And the rents in our general area are slightly more than what a 30 year fixed rate mortgage would be. If all goes well, the mortgage will be done by the time our youngest 2 hit college (or preferably before the oldest 2 hit college).
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Old 02-05-2008, 01:22 PM   #33
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I think we are in a recession as well. It's not looking good right now for everyone who has mortgage payments right now. I just think they aren't making educated decisions and learning from history to change the countries economic problems right now
Most folks can't pay cash for a house. I make mortgage payments but my house will be paid off 5 years before I retire.............how is that irresponsible??
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Old 02-05-2008, 01:30 PM   #34
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Most folks can't pay cash for a house.
Wouldn't that be a trip if people had to save up and pay cash.

The modern mortgage has only been around since about 1934. There were mortgages prior to that, but people were required to pay them off (or refinance) after 5 years, I think.
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