Banking Home Loan

By: EconomyWatch Content   Date: 23 December 2009

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Banks offer a range of home loan products at fixed or adjustable rate mortgage. Some loans offer lower interest rates initially and therefore appear affordable and attractive to buyers. In case of a fixed rate home loan, the rate of interest remains the same over the life of the mortgage. On the other hand, an adjustable rate mortgage changes after an initial period, typically one year. 

Your decision on whether to opt for a fixed or adjustable rate mortgage should be influenced by your personal financial situation. Analyze what your earnings will be in the next few years before taking a loan.

Banking Home Loan: Adjustable Rate Mortgage

 

Also called a floating rate mortgage, an adjustable rate mortgage (ARM) is a type of banking home loan that features flexible interest rates. Any upward or downward fluctuation depends upon a rise or fall in the national index. The adjustments are always done in the favor of the lenders.

 

Adjustment rate mortgage is calculated using the following rate indices:

  • The Constant Maturity Treasury (CMT)

  • The 11th District Cost of Funds Index (COFI)

  • The 12th month Treasury Average Index (MTA)

  • The National Average Contract Mortgage Rate

  • The London Interbank Offered Rate (LIBOR)

 

Adjustable rate mortgages are quite popular in the UK, Canada and Australia. It is a good option when mortgage rates are likely to plummet, as indicated by the economic trends. Financial institutions that mainly run on customer deposits and cannot afford the risk associated with fixed loans. Homeowners who intend to sell their homes in the next few years can leverage on the lower monthly payments on an ARM. At times, banks offer guarantee of no upward changes in rates on certain ARMs. This enables homeowners to take advantage of affordable mortgages on their property.

 

It is curial to note that an ARM is not always the cheapest option. Homeowners may end up paying a huge amount on an ARM, as compared to a fixed rate mortgage. However, an ARM protects borrowers through a cap or limitation on charges. This keeps the frequency of fluctuations on interest under control. At the same time, it ensures a fair transaction to lenders.


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