Your Lender May Try to Confuse You by Comparing ARM Loans with Different Indexes.
Just as a lender that is not competitive on one particular loan type may try to steer you into one of its more competitive programs, a lender can also try to move you into another index.
This switch is common. If you're talking to a lender and it gives you a rate quote on one of its ARMs, it's likely that the loan officer won't tell you the index that is being used, even though that lender has ARM programs for almost every index imaginable.
If you've decided on an ARM and you call a lender and ask for its one-year ARM quote, you'll get the lender's most competitive ARM. Probably. But if you don't also ask for the index, you may be being quoted apples and oranges.
One index might be down for a few years or recent months, while another index might be trading up. You may not know the history of those indexes, and, quite honestly, even if you did, it would still be a toss-up. But if you simply get an ARM quote from one lender and then from another lender and then from another without knowing the index for any of those quotes, you're lost, and you're wasting your time.
ARMs can be confusing enough as they are without trying to cross-compare.
Do Your Research and Choose an ARM Only When Rates Are at Relative Highs.
Okay, here's the caveat: No one can accurately predict the future. But one can use the past as an indicator. The best Web site I know for researching interest rates is at hsh.com. There are certainly other places, but this is the site I've always used, and it doesn't cost anything.
Interest rates move in cycles; they go up, and they go down. But they don't move wildly. A one-year Treasury index won't go from 5.00 percent one day to 15.00 percent the next. Rather, they move in slower, incremental steps.
If rates are high compared to the recent past, you may want to consider getting an adjustable-rate mortgage. Because ARMs start out with lower teaser rates and have adjustment caps, your initial rate will be lower than those on current fixed-rate products.
And if you're lucky and you chose correctly, your adjustable rate will actually go down. Yes, you got the lower teaser rate, but because rates in general had started on a downward path, your mortgage payment actually went down—not up.
Yes, just as ARMs can go up, they can also go down. Quite a nice surprise, isn't it? Yes, those mean old lenders don't have it in for you every time, now do they? No, they can actually provide you with a nice annual present.
If during your research you see that interest rates are at highs that have not been seen for four to five years, you should consider an ARM.