Information on Ajustable Mortgage Loans

BILL'S ANSWER

Adjustable rate loan terms are most commonly seen with mortgages, but many lenders do offer adjustable rates on home equity loans and lines of credit, as well as some types of unsecured loans. The terms you can expect on the proposed loan will depend on many factors, including the lender, the type of loan, and your credit rating, among others. You state in your question that you are looking for a “line of credit,” but do not say whether this is a secured home equity line or an unsecured personal credit account. Given the low interest rate being offered (4.04%), I would assume that the loan you are asking about is a secured home equity line of credit (HELOC). To learn more about home equity credit lines, I encourage you to visit the Bills.com Home Equity Resources page.

Without knowing the details of the loan you have been offered, I cannot tell you specifically when your interest rate will change or the amount your payments will increase. There are too many loan programs available for me to make any generalizations about what interest rate or payments you can expect from this loan. Before agreeing to any loan, I strongly encourage you to carefully review the loan agreement to make sure you fully understand all of the terms being offered. In addition, if there are any portions of the agreement that you do not fully understand or about which you are concerned, I would advise that you discuss the loan with an attorney or other real estate professional to provide you with honest and competent advice. Your attorney can not only answer your general questions, but can review the actual loan agreement to make sure that you are not signing a loan which will charge excessive interest or which you will be unable to afford.

The interest rate charged all adjustable loans is calculated based on an “index” rate, which is defined by the loan agreement; the most common indices are the CMT (1-year constant maturity Treasury bill rate) the COFI (Cost of Funds Index rate) and the LIBOR (London Interbank Offered Rate), all of which are benchmark interest rates set by various financial regulatory bodies, and which change from time to time based on the overall economy. Banks use the index rate as a baseline, and add an additional fixed amount, called the “margin,” to calculate the interest rate that will be charged on your loan. For example, if the index rate is 5% and the margin on your loan is 3%, you would be charged 8% (5% index + 3% margin). You should carefully review you loan agreement to make sure you fully understand how your interest rate will be calculated. You should also review historical data on your index rate to help you determine how much your interest rate is likely to vary over the life of your loan. You can find data on many important bank interest rates at bloomberg.com

Most adjustable rate loans offer a fixed interest rate for a certain period of time at the beginning of the loan. For example, it is common for loans to have a set rate for one year before the first rate adjustment is calculated. After the introductory period, your rate will adjust periodically—once per month, once per year, etc. How long your introductory fixed-rate period will last and how frequently the rate will adjust depends on the terms outlined in your loan agreement. You need to discuss these issues with your lender and review the loan documents to make sure you fully understand these components of the loan. For a detailed explanation of how adjustable rate loans work and how taking out an adjustable rate loan may affect you, you should review the Federal Reserve Board’s adjustable rate loan handbook, available here.

Adjustable rate loans benefit many consumers; however, there are significant risks involved, especially for people who enter adjustable loans without fully understanding their obligations. The payments on an adjustable loan can increase significantly during the life of the loan, so if you would struggle making the introductory payment, you should probably consider other options. To read about some alternative loan programs you may want to consider, you can visit the loan section of our website.

I wish you the best of luck in finding the best loan option available to you, and hope that the information I have provided help you Find. Learn. Save.

Best,

Bill

www.bills.com/