Refinancing Risk

Finance allah shmoop What is adjustable rate mortgage or arm

Well here's an arm and here's a leg and that's

What Renting the money to buy a home costs you

Yeah Okay Eight r m stands for adjustable rate mortgage

The rate well that's The interest cost of the money

or the cost of renting that money to buy the

home Well the rate isn't it fixed in this case

like five point seven percent for thirty years Where you

know in advance that your monthly payments going to be

nine hundred forty three bucks a month or whatever it

is that would be a fixed mortgage a fixed number

You can count on it for all three hundred sixty

payments And then the house is all yours So that's

fixed then what's adjustable like yes the interest rate changes

But how does it change Well in a standard arm

there is some global standard on which the rates are

often price like lie bore the london interbank borrowing offering

rate It's one of the key things that price is

the cost of renting money all around the world with

the actual rate of libel or is generally reserved for

banks like super cheap cost of renting money to banks

who are very likely to pay back the money with

no hassle that rate is more or less what banks

pay for running the money along with blue chip customers

in real life The banks then mark up a premium

on top of the rate that they're paying to rent

the money to themselves And then they resell or re

rent that money teo their prized customers So the pricing

of bank my views in renting money to joe six

pack could be something like lie boer plus three percent

or three hundred basis points So if libel or is

it didn't say two and a half percent today the

adjustable rate might be five and a half percent and

all that's great honor given alone It might mean that

for a while you're paying seven hundred twelve dollars a

month for your house payment wonderfully cheap and in fact

banks market these low rates initially to help people be

able to afford tto by that new home and live

of the dream You know the american dream usually with

an arm there's a teaser rate that starts really low

Like at live or live or plus ten basis points

or something like ridiculously cheap for six months or a

year something like that Then it has an incremental set

of step ups in interest costs and venit adjust with

the markets usually upward maybe upward by a lot Remember

there's a reason it's called a teaser rate but then

if we get inflation or a you know just bank

nervousness for there are weird effects from brexit or the

volume of transactions going through london or something weird happens

Well then the liquidity drops and interest rates rise So

now lie board goes up and up and up to

four and a half percent and wealth contractually in your

mortgage paperwork you have to pay live or plus three

hundred basis points no matter what So now that's seven

and a half percent interest on the dough you borrowed

and well we're that toe happen It's likely that your

monthly payment has skyrocketed from seven hundred twelve dollars a

month is something more like twelve hundred dollars a month

or more Can you handle that big of a payment

Well have you done a fixed rate loan at nine

Hundred forty three dollars a month Well you'd still be

paying on that number but you rolled the dice with

an arm and now you owe big bills There go

that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh