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  Should I take a fixed or adjustable rate loan? The fixed rate loan is straightforward. You make the same payment every month, and your interest rate and payment never change. However, for one reason or another borrowers only seem to keep their loans, fixed or adjustable, for no more than 5 years! Why? People relocate, need to refinance their loan to access equity in the form of cash to payoff consumer debt, do home improvements, or simply just to lower payments or obtain a better interest rate than they currently have. With this in mind, borrowers can obtain say a 5 year hybrid adjustable rate loan which gives you a lower interest rate than a 30 year fixed rate loan. You could save thousands over that 5 year period. If you have imperfect credit, or if your credit score dropped recently, a short term hybrid adjustable rate loan, a 2 year fixed which than becomes adjustable after the intial fixed period, would be a better option than a 30 year fixed rate loan. Once your FICO credit score goes up, you will want to refinance the loan to obtain a better interest rate. Another train of thought is that borrowers are able to get more home for their money since the payments may be lower with an adjustable rate loan, which means they qualify for a greater loan amount and purchase price. Later the adjustable rate loan may be replaced by refinancing the loan into a 30 year fixed rate loan.
How does an adjustable loan work? To understand how an adjustable rate works, you first need to know a few things. All adjustable loans have two main parts: The margin and the index. Margin + index = your interest rate The margin is the lender profiit. This figure never changes. It's the only thing on your adjustable rate loan that stays constant. Hunt for the lowest margin possible to ensure a lower payment for the life time of your loan. Margins are negotiable! The index is an economic indicator that your loan is tied to that moves on a monthly basis. There are several indicies that loans are tied to. LIBOR, 11th District Cost of Funds (also known as COFI), and TMAT's are the most used indecies today. However there are many more. What makes your monthly payment adjust? Indecies all behave a bit different from one another. Some are volatile and some are slow movers. I'll cover a few below. LIBOR- This is an acronym for London Inter Bank Offered Rate. It is tied to the European economy, specifically England. Their economy closely mirrors our economy and tends to be the most volatile index and can jump around some, which makes your interest rate on your loan jump around a bit. But when interest rates are on the downswing it is historically the lowest index, which makes your mortgage payment lower, so many borrowers are steered toward it for that reason. The 11th District Cost of Funds (COFI) The Federal Home Loan Bank divides the country up into districts. The 11th district is comprised of the states of Arizona, Nevada, and California. The cost of funds is the average deposit rate that member banks pay on savings, checking and c.d.'s and other savings types of accounts. As those rates go up, this index goes up, which makes your home loan interest rate go up or down. Savings account rates don't jump from 1% to 2% from one month to the next. Banks are slow to increase the rates they pay to their depositors (customers) so this index is more stable. But in a downward interest rate cycle, this index is slow to react, meaning that your mortgage interest rate will not go down quickly like it would on a LIBOR loan. But when rates go up, your mortgage payment won't shoot up right away either. In all the 11th District Cost of Funds is the more conservative, safer index to be tied to if you have an adjustable rate loan. Treasury Securities- T-Bills indecies There are several types of indecies within the T-Bill family. T-Bills are investment instruments that the United States issues, with various maturity dates and rates of return. The 1 year average T-Bill is a common index in which real estate loans can be tied to. It is closely tied to the United States economy. Inflation in the United States can drive this index upward, so it is indeed cyclical and will react on a monthly basis. If we are in a non-inflationary period, it is stable. Ask for a 10 year history for each index before making your selection You can ask your Loan Consultant for this information or you can find it online as well. You will see on a monthly basis how the indecies have behaved. Spikes in the indecies are caused by economic trends. You will see peeks and valleys. See which one you feel comfortable with, and make your decision from there. How often does my payment change? Just because indecies adjust monthly based on local, national, and global activity, doesn't necessarily mean your interest rate goes up right away. Some real estate loan payments adjust monthly, bi-annual, annually, or some interest rates stay fixed for several years before their first adjustment. The type of loan you select depends on how long you're looking to stay in the property, and your tolerance and risk you want to take! An experienced Loan Consultant should be able to present several loan options, and than based on your needs, educate you and ultimately help you make a decision. Call me for for help! Kevin Walton Cell 805-276-1942 Figuring your monthly payment You take your margin, which is negotiated by you and your Loan Consultant, and add it to your index. In the $400,000 loan example above, payments 2-4 are figured using a rate of 6.875% Let's say the COFI index has a yield of 4.02% for the previous month and your margin you negotiated is 2.875%. Add the two together and you come up with 6.895%. Round up or down to the nearest .125% = 6.875% The next month the COFI index will have a new yield. Add that to the 2.875% margin, which never changes, and you will get your upcoming interest rate for the next month. This way you have an idea on what to expect. Lenders use the prior month's index yield when figuring payments. You can find the various index values in the financial section of your newspaper or Google it. It isn't too hard to find. Call me for details and I will customize a loan for you or click here to apply on-line! Kevin Walton Cell: 805-276-1942  Best Capital Funding - 6930 Owensmouth Ave. #102 - Canoga Park, CA 91303 Office Phone: (818) 887-2779 Fax: 800-506-0632 Cell Phone: 805-276-1942 Best Capital Funding.
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