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When Comparing ARMs from Different Lenders, Pay Close Attention to the Starting Rate.

The starting rate is often called the "teaser" because it is artificially low, lower than the fully indexed rate. A teaser, or starting rate, is the rate you get at the very beginning of your ARM loan. A teaser could be at 4.00 percent, for example, just to get you "in the door," while the fully indexed rate might be 6.00 percent or more.

You can't compare teaser rates from one lender to the next; they won't be there the following year. Both lenders, if they base their one-year ARM on the same index, will take that very same index and add the margin to arrive at the new rate.

But if you have a lower teaser rate, your lifetime cap is also reduced. If you have a lifetime cap of 6.00 percent, that cap is based on your starting rate. If one lender offers 4.00 percent and another offers 4.25 percent, all other things being equal, choose the lower rate because it also lowers your lifetime cap from 10.25 percent to 10.00 percent.

This might seem like a no-brainer, but it's not when you throw in lender junk fees and origination charges. Remember how to compare rates properly. A lower teaser rate might in fact not be your best deal if getting it costs you a lot more money.

Your Margin Is Your Lender's Little Secret.

ARMs can get lost in a sea of vocabulary. Start rates, LIBOR, annual caps, lifetime caps, fully indexed—it can get confusing. It's the margin that you need to concentrate on.

The margin determines how quickly your rate will rise. If one lender has a 2.00 percent margin and another lender has a 3.00 percent margin, you can see that the second lender will increase its rates 50 percent faster than the first.

You can have an identical start rate, but with a higher margin, your loan can move to its caps more quickly. In fact, it's not uncommon for lenders who offer lower start rates to offset that with a higher margin.

A common margin is 2.75 percent. You'll see this margin available in a variety of mortgage loans offered by lenders everywhere. Anything above that is nothing more than a lender's attempt to get more interest from you faster.

On the other hand, the margin might just be open for negotiation. Or at least you may be able to "buy down" the margin, just as you might buy down a fixed-rate mortgage loan by paying a point. And although paying points to get a lower fixed rate may not always make sense, if you can buy your margin down, you need to explore this. Typical margin buy downs are much more generous than those reserved for fixed rates.

Getting a 1/2 percent margin reduction for a point is not uncommon. Here's an example.

Loan amount is $300,000

Start rate 4%

Index: 1 year Treasury 4.50

Margin 2.75

Fully indexed rate 7.25%

Now pay 1 point to buy your margin down to 2.25: Fully indexed rate 6.75%

On a $300,000 note, 1/2 percent equals about $100. With an ARM, when you buy down the margin, you'll always enjoy that lower payment because of your caps and your margin. In this example, you paid $3,000 in points to reduce your monthly payment by $100. But you get this savings over and over again until and if you reach your lifetime cap.

When rates adjust, your adjustment will always be $100 less when you have a lower margin. That means for as long as you own the mortgage. Always ask for margin reductions. It may not be something that's printed on a lender's rate sheet, but it's worth inquiring about.

 
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