Dont ignore the margin

The interest rate you pay for your ARM includes the index rate plus the margin. The margin pays a lender's overhead, operating expenses, and profit, as well as the costs lenders suffer when borrowers default and lenders foreclose.

Often, ARMs include margins that range between 2.0 and 3.0 percent, although I have seen margins as low as 2.125 percent and as high as 6.0 percent. (Margins on loan products that target sub-prime borrowers with stained credit exceed other types of ARMs.) Because the National Average Contract Mortgage Interest Rate Index is calculated from mortgage rates (as opposed to other types of baseline rates), ARM loans tied to this index apply no margins.

When you compare the same ARM product and index among various lenders, ask for the applicable margins. Pay special attention to margins when you compare similar products and indexes with teaser rates that differ from each other. Say you find two lenders who offer COFI ARMs. One lender opens with a teaser rate of 3.95 percent for six months. The other lender gives a 4.5 percent teaser for three months. Superficially (all other features equal), the 3.95 percent teaser looks best. But remember, that teaser could dull your comparison. The lender uses it to distract you from the fact that that lender will be adding to the COFI a high-end

10During the early 1980s and mid-2000s, some short-term interest rates exceeded long-term rates, which is called an inverted yield curve. This situation can occur when inflation fears arise, but investors believe the Fed will prevent big price jumps over the longer run. Generally, long-term rates exceed short-term rates to protect investors against an unexpected, money-cheapening rise of the CPI. Investors fear that rising consumer prices will erode their buying power (the value of their money) when eventually borrowers pay back the money investors put up today.

margin of perhaps 3 percent. In contrast, if the competing lender offers a 2.5 percent margin, that lender offers you the better deal.

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