Adjustable mortgage rate – these were the three little words ruffling the mind of Kate, who was sitting in the office of her financial advisor. She intended to go for loan adjustments. Her financial advisor had told her to learn certain things about the best option to deal better with her lender.
In fact, Kate herself was keen to know about the way lenders adjust loans, to what index they tie it to, and what their margins are. She could still remember the payment shock that her friend, Mary, experienced last month. Mary had gone for adjustable mortgage rate and ended up paying a hefty sum that she’d never even dreamt of.
Kate was an art student. So, financial terms apprehended her. So is the case with many people. However, you need not have a degree in financing to understand certain terms of adjustable loans, and others. And that’s why Kate was here, at her advisor’s office, to gain an insight into the financial jargon.
The only margin that Kate knew was the left and right margins on paper! Here’s a different margin – the lender’s margin. It’s the amount your lender sets up the index at which the adjustable rate is tied to while adjusting your mortgage rate. It’s the lender’s margin that decides the rate of increase of your low rate during loan adjustment.
When you compare two loans with the same indexes as well as interest rates, the loan featuring a higher margin will be costlier. Such a loan will witness a quick rise of rate during rate fluctuations. Therefore, it’s crucial to know the margin before opting for adjustable option.
Kate was eager to know the common margin for rates to get the best deal. Commonly, the margin for adjustable rates of mortgage is 2.75 percent. If your lender offers you a higher margin than this, it’s obvious that he or she is trying to extract dollars faster from you while making adjustments in your payment.
Another thing to remember is that when you opt for adjustable rate of mortgage, your margin is subject to negation, similar to other elements of your loan. It’s wiser to bring down your margin by looking for alternatives of payment rather than pulling down your first mortgage rate.
Usually, lenders lower the margins by about half a point during negotiation. So, it’s time to hone your negotiation skills! For Kate, it wasn’t a problem. Being a public relations executive, she was into negotiations every day. She remembered her financial advisor’s words – always ask for a reduction in margin before picking an adjustable mortgage rate. If only her friend knew this golden rule!