Adjustable Rate Mortgage Buying a House

The cost of repaying an adjustable rate mortgage (ARM) changes over the life of the loan.  As a potential home buyer you may favorably view acquiring this type of loan when interest rates are low.  If you have ARM financing, your initial payment terms tend to be very good.  However, your lending institution intends to make a profit before the principle (money borrowed) is repaid.  That profit comes from charging interest on the principle.  With an ARM your lender anticipates increasing the interest earnings over the life of the loan.

The interest rate isn’t arbitrary.

It’s tied to an index.  An index is an interest rate related to the cost of doing business at high financial levels—like the Prime Rate (which is the interest rate banks charge other banks when they lend them money).  However, for an ARM the Cost of Savings Index or the 1 Year Treasury Index are among the indexes more likely to be considered.

 Index rates fluctuate, so they are usually quoted at a periodic average.  The index used can be a 2, a 3, a 6.5—any percentage; it is determined by the process of money making money.

Your lender will add a margin to the index used.  (Margin means additional interest points.  There are 100 points per one percent.)  Basically, the margin insures the lender of making some profit, so your credit worthiness is influential in determining it.  The more risk the lender perceives in recouping the loan principle, the higher the margin will be.

Say the index your lender is using when you apply for an adjustable rate mortgage is at 3.75 and you are assigned a margin of 2 percent: This means the initial interest rate on your loan would be 5.75 percent. 

I’ve mentioned an initial period or initial interest rate a couple of times.  That’s because the interest rate on this type of mortgage is set up for periodic change.  That variability occurs in the index rate.  The margin, however, is constant for the duration of the loan.

The initial rate period is a significant issue.  Depending on your loan agreement, it can last one month or up to several years.  Your interest rate is fixed for this period and (often) is the lowest it will ever be.  Sometimes a lender will even give you a discounted rate for this period.  But, watch out!  A ridiculously low initial rate might be followed by a really large increase built into the first adjustment; it’s also possible for your lender to recoup funds through high closing costs.

After the initial payment period the interest will be adjusted at predetermined intervals to reflect (then) current rate of the index to which it is tied.  (An exception to this could be the first adjustment.  The rate for that one is, sometimes, determined as a separate item in the loan agreement.) Subsequent adjustments will be made on a regular schedule—monthly, quarterly, semi-yearly, yearly, or every x-number of years— according to your loan agreement. 

Since it is impossible to predict what an index will do over a number of years, your adjustments may result in increased or decreased interest rates.  Adjustable rate mortgages are typically written for 15 or 30 years.  Within those blocks of time there could be several economic booms or busts—trends that influence index rates.  Indexes could vary significantly from period to period.  For protection against extreme interest rate increases, insist on rate caps (periodic and overall) in your contract.

Some indexes do not allow for rate caps.  You risk exorbitant interest increases if your loan is tied to one of these. 

You can be sure your lender will want to include a floor. The floor is the lowest rate to which your interest will be allowed to fall.  (This is, really, another type of cap—one that favors the lender.)

Another protective measure on your part would be to include a conversion clause.  This clause allows you to change your adjustable rate mortgage into a fixed rate mortgage.  Its terms can be negotiated.

The unpredictability of indexes and therefore of your interest rate is the great risk in taking this type of loan.  The great advantage of an adjustable rate mortgage is its low initial interest rate.  As you begin to repay the loan, your interest payments will be much lower than any associated with a fully fixed rate.

This benefit can often be utilized by taking a long-term loan. (If your financial profile is good, that can help in securing a lower margin.)  Negotiate the longest initial rate period you can.  Then, pay off the loan very early.  This requires you to plan ahead and arrange the financial resources to accomplish your purpose.  (Of course, lenders are familiar with this strategy and may try to incorporate a penalty fee for early payoff.  —It’s up to you to calculate and defend your advantage in any contract.)

Remember:  When buying a house, you can shop for a loan—the same way you would shop for any other commodity.  Do some product research.  Then, check out several lenders, and compare available terms before applying for an adjustable rate mortgage.

Orange ladybugs How to get rid of Orange Ladybugs

It was wishful thinking; I wanted them to be gone—those orange ladybugs.  They aren’t. 

I’m sure you know what I’m talking about.  In the fall they swarmed in, settling on everything.  For weeks (maybe months) I couldn’t walk through my house without stepping on their little carcasses.  Occasionally I felt like I was the target of a dive bombing mission.  They bite and they smell.

Of course this wasn’t the first time I had these critters winter-over in my house, but it seems like they were here in greater numbers than before. They were a nuisance until shortly after Christmas.  Then, they just sort of disappeared until early March when they started littering my floors and swarming around the windows again.  Experience tells me they will soon head for the outdoors, but they’ve been enough of a pest that I thought I’d look into the what, where, when, and why of them.  I wanted to know if there is something I can do to keep them from coming in next year.

These orange ladybugs are not the ladybugs I grew up with.  Those were red with black dots, considered cute—used as decorating motifs and clothing embelishments from time to time—and the inspiration for a favorite old nursery rhyme, “Ladybug, ladybug, fly away home…”  The new ones certainly are not enjoyable.  They are, however, part of the same beetle family, coccinellida.  In most English speaking countries they are all commonly called some variation of ladybug, ladybird, or lady beetle.  I think the newcomers are properly call Multi-Colored Asian Lady Beetles because they really do come in a variety of colors—oranges, browns, tans; it’s the orange ones we seem to notice the most.  Other than color these orange ladybugs look pretty much the same as our native red ones to most people.  And, they give us the same benefit the red ones did. They eat plant aphids and other agricultural pests.  In fact, that’s why they are here.

As early as the 1960s, in an effort to control aphids on crops as varied as pecan trees, apples, and soybeans, the US Department of Agriculture sponsored a program to release ladybird beetle species from Asia and Australia.  This was done even though the US had hundreds of native species.  It does need to be said that many of these native species, individually, prefer one or another plant pest as a food source.  Other eating habits and their habitat range also vary.  So, the thought behind the project may have been “to fill a hole.”  It also should be noted that since the foreign species have been introduced, populations of native species have been in decline.  (When was the last time you actually saw a red ladybug?) 

It is not known if the presence of the newcomers is contributing to the decline.  What is known is that the new species are prolific.  They were originally introduced into several eastern and southern states and have spread across the country.  By the mid 1990s people were beginning to consider them a nuisance because they infiltrate homes in great numbers during cold weather.  Orange ladybugs seek shelter when the outdoor temperature falls below 50 degrees Fahrenheit—hibernate during the coldest weather—and become active again when the temperature rises.   They will find any warm, protected crack or crevice. It just so happens that our homes and other buildings provide plenty of spaces that meet the criteria.  That they pack themselves together in large numbers increases the warmth factor.  This probably contributes to the lengthy life span (2 – 3 years) of this variety of lady beetle.  Our native red ladybugs, which rarely live through a winter, do not exhibit the swarming behavior.

Because they swarm in our houses orange ladybugs are a nuisance, but they are not officially considered a pest.  They consume a great many other insects that are detrimental to crops and gardens.  They pose no major threat to humans.  They can bite, but are not reported to draw blood.  They do not purposefully target people and it is thought that many so-called bites may be a prickling sensation from stiff, hairy spurs on their legs.  They also stink.  The odor comes from an orange fluid (beetle blood) emitted as a defense.  Some people are allergic to proteins in this fluid.  It can stain walls and fabrics, too.  Personally, I find it most unpleasant to realize I’m swallowing one as I take a gulp of coffee.  They do get into everything.

I was greatly interested in finding an answer to my question about keeping these insects out of the house next fall.  What I found was not highly encouraging.  Basically, all one can do is prepare the house for cold weather inside and out.  Caulk around switch plates, outlets and any vents to the outside.  Covering vent openings with a small mesh screen at the outside end helps, too.  Make sure windows and doors fit their frames correctly and caulk around them.  If you find a mass on the outside of your house, hosing them off may inspire that bunch to move on—but more will come.  Inside, vacuuming them up is the easiest way to remove them.  (You will want to immediately empty the vacuum outside; it will stink.)  Using bug sprays on any found hibernating is not very effective as their respiratory rate will be too low for the chemicals to work.  Some black light ladybug traps are advertised online.  But again, if the traps work, still more beetles will come.  For this same reason hiring an exterminator is next to futile. (Also, many exterminators hesitate to destroy insects that are so beneficial to crops.)

In conclusion—more will come.  We’ll be sharing our houses with these orange ladybugs again next winter.

Fixed Rate Mortgage

Whether it’s realized or not, a fixed rate mortgage is the initial way most people consider financing when they are buying a house.

Since most of us need to finance the majority of the cost, we apply to a bank or other lender for a mortgage loan.  Based on a number of qualifications including your financial profile (I discussed this in an earlier post) and the value of the property, the lender pays for the property and terms of repayment are established.  — For the duration of the loan the lender will hold title deed to your property as collateral (security) against payment default.

The amount of money lent is called principle.  The length of time you have to repay the principle is set when the loan is issued.  (It’s usually 15 or 30 years and payments are most likely to be made monthly.)  You will repay the principle in increasing increments.  This may sound odd since I’m talking about a loan called a fixed rate mortgage, but “rate” is not a reference to speed.  Rather, the percent of interest you are charged is fixed (set) for the duration of the loan.  (Your interest rate will be lower if you take a 15-year mortgage.  —Lenders feel the risk of default increases with the longer 30-year term.)

Interest is the lender’s compensation for making the loan and payments are set up so that your first payments are almost entirely interest; very little of your initial payments go against the principle.  Over time, however, small increments of repaid principle add up, leaving less of a balance on which to charge interest.  Slowly, your payments will change from being primarily interest to mostly principle.  And, since the financial experts know the schedule at which this happens, they can set the dollar amount of your mortgage payment at a constant.

(Note:  Even though your mortgage payment remains the same, there are some other costs—like insurance—that are bundled with your monthly payment.  These additional obligations may cause your total housing payment to vary slightly over duration of the loan.)

As you pay off the principle of your loan (the money you owe), you accrue equity (monetary worth; money you can use) in your property.  During inflationary times your equity value can increase quickly.  This means that the financial impact of the interest you pay on your fixed rate mortgage decreases.  Of course, when the general economy falls (and therefore, property values) your interest will cost you more in relation to the worth of your equity.  Nevertheless, because of its consistency and because it facilitates budgeting, a fixed rate mortgage is attractive to many home buyers.

Mortgage house mortgage

In my last post about buying a house I talked about some financial information a traditional lender will want to see when you apply for a mortgage.  Next I want to present the forms that type of mortgage can take.  (The most common are fixed rate and adjustable rate.)

You probably know that a traditional mortgage isn’t always an option for everyone.  In fact, in an earlier post I brought up some alternative forms of financing that involved motivated sellers.  So, you can expect me to address that topic again soon.