An adjustable rate mortgage (ARM) has an interest rate that fluctuates periodically. This is in contrast to a fixed rate mortgage, which always has the same interest rate.
Every ARM has basic components:
An interest rate cap
An initial interest rate
An ARM’s interest rate is tied to one of many economic indices, some examples of which are the 1-year constant maturity Treasury security, the Cost of Funds Index, or the London Interbank Offered Rate. Different indices move at different rates so know the characteristics of the index used for your ARM.
The interest rate for your ARM will be calculated by adding a margin to the interest rate from the index. The margin is basically the markup charged by the lender that allows them to make a profit off of your loan, such as adding 2% to the index, where the 2% is the margin. The margin of your loan usually does not fluctuate.
The Adjustment Period
The Adjustment Period controls when and how often your interest rate changes. For example, if your ARM has an adjustment period of 1 year, your interest rate will be subject to change at the end of each year and your monthly mortgage payment will be recalculated to reflect this change.
The Interest Rate Cap
Interest rate caps are built into the loan to protect the borrower from drastic interest rate fluctuations. The caps limit how much the interest rate or monthly payment can change at the end of each adjustment period. An ARM can also have a cap for the life of the loan. For example, during the life of a loan, the interest rate can only be increased by 5%.
The Initial Interest Rate
The Initial Interest Rate is the interest rate that you start with at the beginning of your loan period. The length of time your loan stays at this rate is built into the loan. For example, you may stay at the initial interest rate for 1 year, 5 years, or another length of time depending on your specific mortgage. This type of ARM is generally referred to as a Hybrid ARM. The initial interest rate for an adjustable rate mortgage is generally lower than that of a fixed rate mortgage.
We found Friend Wells knowledgeable, and eager to show us many possible homes until we finally found just the right home for us. He also saved us a couple of thousand dollars in the negotiation
process! Most of all, it was a great relief to know that he is a man of character, so we could be confident that he was doing his utmost to help us and not looking out for anyone else's interests. I have
complete confidence in his integrity.Rick & Linda T
* Fee varies for homes over 250K. Call for details. 6% used for comparison purposes only. Commissions may be negotiable and are not established by law. Each Office Independently Owned & Operated. The information herein is deemed to be accurate but not guaranteed. All information to be verified.