Tue, 01 Sep 2009 19:07:00
 |
| Article by:
Lamarre and Dearman
|
|
|
|
|
Today's mortgage market includes very few of the exot-
ic loans so prevalent in recent
years.
“Option ARM,” “hybrid,”
negative amortization,” “stated
income,” “low doc” and “no
doc” loans have virtually evapo-
rated, some would say thank-
fully. The remaining field of
mortgages is relatively tame and
easier to understand. One less
explored area concerns the basis
of rate setting.
Home Equity Lines of Credit
(HELOC’s and other short-term
lending vehicles
The prime rate is the rate
banks use to lend money to each
other and is a commonly used,
short-term interest rate. Many
credit instruments such as home
equity loans and lines of credit,
automobile loans and credit card
rates are based on this index
and use it as a foundation rate
for pricing various short-term
loan products. When there is a
change to the U.S. prime rate,
any loan product that is tied to
prime will also change. Providers
of consumer and commercial
loan products often use the U.S.
prime rate as their base-lending
rate, then add a margin (profit)
based primarily on the amount
of risk associated with a loan.
Adjustable Rate Mortgages
Rates for adjustable rate
mortgages, or ARM’s, are based
on a variety of indices that often
reflect the prime rate, but are not
strictly based on it. These eco-
nomic indices include rates of
shorter-term Treasury bills such
as the one-year Treasury bill, the
Cost of Funds Index, which is
based on the national or regional
average cost of funds to savings
and loan associations and the
London InterBank Offered Rate.
To arrive at a mortgage rate
they will offer potential borrow-
ers, lenders take these indices
and add what is termed a mar-
gin or profit to the lender. The
amount of the margin may dif-
fer from one lender to another,
but it is usually constant over
the life of the loan. For example,
if the rate on an index were 3
percent and the lender added a
margin of 2.5 percent, the rate
the borrower would pay – at least
initially – would be 5.5 percent.
The rate will change over time
as the index and loan terms
which index will be used, how
often it changes, how it has fluc-
tuated in the past and where it is
published.
Fixed-Rate Mortgages
Fixed-rate mortgages, those
that are for 15 or more years in
length, are considered long-tem
lending. Unlike adjustable rate
mortgages, fixed rate mortgages
are not tied to an index. For the
most part long-term mortgage
rates have followed the yield on
the ten-year Treasury bill, which
tends to change with economic
conditions.
Whatever your choice in a
current or future mortgage, be
sure to understand the terms
and indices. Have your mort-
gage broker or lender walk you
through relative advantages and
disadvantages so you can weigh
the options and make a wise,
informed choice based on your
individual circumstances.
Pamela Lamarre and Tracy
Dearman are business partners
and head California State Funding
Group and HSM realty finance
management, respectively. For a
free consultation, CMA or more
information about the mortgage
market, email Lamarre at pla-
marre@sbcglobal.net or Dearman
at tdearman@hsmsf.com. For
additional information, visit www.
hsmsf.com.
|
