Home Buying in Chicago>Question Details

Greg Olson, Home Owner in Chicago, IL

Please Explain A 30-year Mortgage with a 10/1 ARM

Asked by Greg Olson, Chicago, IL Thu Sep 26, 2013

Hi,

My sibling is concerned about the mortgage we inherited when our parents passed.

The original mortgage was taken out in 1999 and then refinanced in 2003/4. The 2003 mortgage is the current mortgage. It is a 30-year mortgage with a 10/1 ARM. The rate begins adjusting in early 2014.

My sibling is concerned that the refinance means that value has been taken out of the house. I've explained that that isn't true, we only owe what's left on the mortgage. We owe just over $210,000 plus a home equity line of credit. I've tried to explain to my sibling that the real concern isn't that the ARM causes the home to lose value, but rather we need to worry about the interest rate going up. There is, I believe, a 2% cap either way on how much the interest rate can rise or fall in a given year.

Will someone please break this down, please? Perhaps one of you can explain it better than me. Thanks

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Answers

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Hello Greg,

Because your ARM begins it's adjustment period next year, no one has a crystal ball to predict what the index will be in 2014 that is in your loan terms - you need to look at your options. Also, you have a second mortgage- your line of credit - it maybe a good time to look at your options for both, one would be to refinance your ARM and your second mortgage into one loan term.

Please explain to your sibling, that unless you take additional money out of the mortgage, refinancing will not be hurting your equity or value of your home. I would be happy to review with you your options, please give me a call to discuss.

Thank you,
Mary Kay Laurent
Associate Vice President of Mortgage Lending
marykay.laurent@guaranteedrate.com

http://www.guaranteedrate.com/MaryKayLaurent

o: 773.516.6859 - m: 312.403.4150 - f: 773.328.1740
1 vote Thank Flag Link Fri Sep 27, 2013
The loan is amortized over 30 years but the rate is only fixed for the first 10. After that, it will adjust every year based on the margin and LIBOR of whatever index they selected. There are usually caps as well that limit the amount of the adjustment. For a 10 year, it typically will save you more money over a 30 year fixed for the first 13 years or so.

For a pre-approval, you can call me at (630) 639-1081. I have worked in the area for the past 15 years and work with several quality realtors in Chicago. Our company works directly with Fannie Mae and Ginnie Mae and fund the loans in our name. We aren't waiting around on the big banks to approve the deal. We staff our own underwriting department and get things done quickly. You can call me at (630) 639-1081 and I can give you a preapproval the same day and help you find a quality realtor in the area.

We can do: FHA, Conventional, USDA, VA, HARP, Interest Only, Home Equity, Fixed, and Variable. Find out which product is right for you by calling Brad at (630) 639-1081.

Brad Neumann
Sr. Loan Officer
Mobile Phone: (630) 639-1081
Email: bneumann@myccmortgage.com
3130 Finley Rd. Suite 510C
Downers Grove, IL 60515
0 votes Thank Flag Link Tue Oct 8, 2013
call Wesley
Our Team | United Equity Mortgage Corp.
http://www.unitedequity.us/our-team.html‎
15+ items - Wieslaw (Wesley) Jura Vice President. NMLS ID 225274 ...
Wieslaw (Wesley) Jura Vice President. NMLS ID 225274 773-304-3412.
Paul Gondek Senior Loan Originator. NMLS ID 226276 773-304-3414.
0 votes Thank Flag Link Thu Oct 3, 2013
He Greg,

I rely on the expertise of Mary Kay Laurent from Guaranteed Rate. She is simply the best.
0 votes Thank Flag Link Fri Sep 27, 2013
Greg,

The initial cap is the maximum that your interest rate can increase for the first adjustment. As you indicated, your first adjustment will take place in 2014. If the first number of your caps ( */*/*) is a 5, then it can adjust 5% from your current rate in 2014. If it's a 2, then it can only adjust 2% from your current rate. I hope this makes sense. If not, I would be happy to explain further.

Matthew Roder
VP of Mortgage Lending
Guaranteed Rate
630-388-9533
matthew.roder@guaranteedrate.com
0 votes Thank Flag Link Fri Sep 27, 2013
You got some good answers.

You really need to talk to a lender personally. The person you are using should be explaining this to you directly.
0 votes Thank Flag Link Thu Sep 26, 2013
It means refi to a fixed rate now that mortgages are far below the rate you would have gotten in 2003.
0 votes Thank Flag Link Thu Sep 26, 2013
It really depends on how long you plan to keep the home. The first thing to do is have someone review the Note to verify terms. Based on the date the loan was taken the indicies are much lower now. When the loan adjusts it is based on the index and the margin written in your terms. With this information you can look up that index online and the margin on your loan and calculate the new rate and payment. If you plan on selling the property in the next 12 months it may save you money to let it adjust. It could also make sense to refinance if rates are not favorable and you plan in holding for a longer term. If you need assistance in reviewing your circumstances and understanding the terms of your current loan kindly let me know, I'd be glad to help.

Jim Pontious
Mortgage Banker
PHH Home Loans
Jim.Pontious@phhhomeloans.com
NMLS #201084
0 votes Thank Flag Link Thu Sep 26, 2013
Thanks for answering. Can you tell me more about the initial cap?
0 votes Thank Flag Link Thu Sep 26, 2013
When the rate on an ARM adjusts, there are limitations on how much it can increase or decrease. These limitations, called “caps” include the “initial cap”, the “periodic cap”, and the “lifetime cap”. The initial cap is the limit on how much the rate can adjust the first time it adjusts. The periodic cap is the limit on how much the rate can adjust after the first adjustment. The lifetime cap is the limit on how much the rate can adjust over the life of the loan. Different ARMs carry different caps, depending on the program.
Flag Wed Oct 2, 2013
You are correct. You need to be concerned about the interest rate increasing. The 10/1 ARM means that the interest rate will adjust once every year after the initial 10 year period, which sounds like 2014. The adjustment will depend on the index + the margin. Your caps will prevent your interest rate from going over a certain point. Most ARMs have an initial cap, a yearly cap, and a lifetime cap. This will be noted on your loan documents similar to this: 5/2/5. Therefore, a 5% initial cap, 2% annual cap, and 5% lifetime cap. It may be wise to consider refinancing into a fixed rate mortgage at this time, given that the 30 Year Fixed is still extremely low and has come down a little this week. Feel free to contact me and I would be happy to help.

Matthew Roder
VP of Mortgage Lending
Guaranteed Rate
630-388-9533
matthew.roder@guaranteedrate.com
0 votes Thank Flag Link Thu Sep 26, 2013
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