=The Mortgage Money Guide= Page 8
Updated Edition from the Federal Trade Commission
Creative Financing For Home Buyers
U.S. Government Printing Office
Superintendent of Documents, Mail Stop:
SSOP, Washington, DC 20402-9328
Federal Trade Commission
Changing Rates
Lenders use indexes to decide when to raise or lower the interest
rate on an adjustable rate mortgage. For example, when the financial index
your lender uses rises, the interest rate on your mortgage may also increase
-- it depends on how the index is applied. Fluctuations in the interest
rate can change your monthly payments, mortgage length, or principal balance.
Some of today's most frequently used indexes
are:
- the rate on 6-month Treasury bills, or on 3-year Treasury notes (or how much the U.S. Treasury is willing to pay on money it borrows);
- the Federal Home Loan Bank Board's national average mortgage contract rate charged by major lenders on the purchase of previously occupied homes (or how much people are paying on new mortgages nationwide); and,
- the average costs of funds for savings and loans insured by the Federal Savings and Loan Insurance Corporation (or how much lending institutions are paying on the money they borrow).
Some indexes reflect what the market will bear
across the country; others reflect local trends. Also, some money indexes
are controlled solely by individual lenders. The index you select should
be one that can be verified easily; its past performance may give you an
indication of how stable it is. Have someone with expertise translate past
and potential changes into dollars and cents.
Also find out how the index is used. For example,
if the index changes monthly, is the lender also changing the rate on your
loan monthly? Or, are there limits on the number of times and/or the amount
your rate can fluctuate?
Finally, check how much advance warning the
lender will give you before your new rate and/or new payments go into effect.
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