What is an Adjustable Rate Mortgage or ARM?
An adjustable-rate mortgage is a loan program with a variable interest rate that can change throughout the life of the loan. It differs from a fixed-rate mortgage, as the rate may move both up or down depending on the direction of the index it is associated with.
All adjustable-rate mortgage programs come with a pre-set margin that does not change, and are tied to a major mortgage index such as the Libor, COFI, or MTA. Adjustable-rate mortgages also carry adjustment caps, which limit the amount of rate change that can occur in certain time periods and there are three types of caps to take note of:
Initial: The amount the rate can change at the time of the first adjustment.
Periodic: The amount the rate can change during each period.
Lifetime: The amount the rate can change during the life of loan.For example, let’s say the Initial rate is 5.25% with a margin of 2.25(won’t change), an index of 4.75(can go up and down) and caps of 6/2/6.
Typically, an adjustable-rate mortgage will offer an initial rate for a certain period of time, whether it’s the first year, three years, five years, or longer. After that initial period ends, the ARM will adjust to its fully-indexed rate, which is the margin plus index. To figure out what your fully-indexed interest rate will be each month with an adjustable-rate mortgage, simply add the margin to the associated index. You’ll be able to look up the current index price on the web or in the newspaper, and the margin you agreed to, which is usually found within your loan documents. You’ll also have to factor in payment caps to see when and how often your adjustable-rate mortgage actually adjusts. Based on the two figures above, your fully-indexed rate would be 7.00%. It is equally important to note both the index and margin when selecting a mortgage program from your bank or mortgage broker. Many consumers overlook the margin, or simply don’t even realize it’s an active component of the adjustable-rate mortgage. And remember, the caps allow the interest rate to go both up and down. So if the market is improving, your adjustable-rate mortgage can go down!Nowadays, most adjustable-rate home loans are hybrids, meaning they carry an initial fixed period followed by an adjustable period, and most homeowners get into adjustable-rate mortgages for the lower initial payment, and then usually refinance the loan when the fixed period ends. At that time, the interest rate becomes variable, or adjustable, and the homeowner would likely refinance into another ARM, something fixed, or sell the home outright. Some homeowners may also choose an adjustable-rate mortgage if the home is simply a short-term investment, or if they don’t plan on owning the home for more than five years, but keep in mind that all adjustable-rate mortgages carry risk as the monthly payments can change, sometimes sharply if the timing isn’t right.All that said, make an interest rate plan before you purchase a property. Decide what you want to do with the home in the next five years, and from there, you’ll be able to decide if an adjustable-rate mortgage is right for you!
With many types of mortgage options to choose from, it’s important you choose an experienced residential mortgage broker who is knowledgeable about the various, and sometimes complicated, loan programs available. Under the guidance of veteran broker Gary Cutler, Global Unity Mortgage puts their clients first by responding quickly to inquiries and going the extra mile to find the best lending program available for their specific needs and they have hundreds of satisfied clients throughout Connecticut to prove it. Call us today at 860-872-9479 or email us at globalu@sbcglobal.net for reliable mortgage assistance and fast pre-approvals.
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