Ryan’s Mortgage Blog:
I wanted to discuss what a “margin” is and how it relates to your mortgage, especially if you are in an ARM (Adjustable Rate Mortgage). The margin is fixed percentage points chosen by the lender that is added to an index (i.e. LIBOR, COFI, MTA). The margin is fixed but the index adjusts. Margins vary depending on the lender, type of loan, length of loan, etc… If you are in an ARM a margin is usually overlooked but can be a big deal when your initial “teaser” term is over. So let’s say you are in a 3 year ARM at 5.75%, so for three years this is what you pay, but when your 3 years is up your mortgage will adjust every 12 months based on the LIBOR (index). BUT the margin is added to that figured to determine your interest rate. So let’s say the LIBOR is at 5.50%, but your margin is at 2%, your new interest will be 7.50% (usually round to nearest one-eighth of a percent), a big difference from the 5.75% you were paying before. I have seen margins as large as 4%, so their interest rate would be 9.50% and may even go higher down the road. This is why refinancing before your initial term of your ARM ends is so popular. One scenario when you may not want to refinance is if your credit history went bad after you got your mortgage and now you are in the subprime category and the value of your house went down so you don’t have much equity either…keeping the mortgage if you had a small margin may not be so bad. Let’s say your margin was 1.5%, you would be paying 7% now, where as if you refinanced you may not be able to get that low because of your current bad credit.
Most ARMs have an interest rate cap that shields you from large increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at one time. So basically let’s say the market went crazy and the index went way up, as long as you have a 2% cap, it can never go up more than 2% in a given term. Caps are pretty large though and hopefully you will never be near your cap rate. I’d like to site mortgage-x for helping me define a margin.
As always, if you have any questions or comments you can reach me at 805-540-0866 or RBaker@PeregrineLending.com.
PS – I definitely heard the sonic boom today! Pretty amazing…It sounded like a garbage truck dropping one of those large dumpsters.