Adjustable Rate Mortgages
An adjustable rate mortgage, or an “ARM” as they are commonly called, is a loan type that typically offers a lower initial interest rate than most fixed rate loans. The benefits of an ARM include greater purchasing power and the ability to build equity faster due to the lower interest rate. The trade off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.
For many people in a variety of situations, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for a shorter time period.
Here is some detailed information explaining how ARMs work.
With most ARMs, the interest rate and monthly payment are fixed for an initial time period such as one year, three years, five years, or seven years. After the initial fixed period, the interest rate can change every year. For example, our adjustable rate mortgage is a seven-year ARM. The interest rate will not change for the first seven years (the initial adjustment period) but can change every year after the first seven years.
Our ARM interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indexes is published weekly in the Wall Street Journal. Typically, if the index rate moves up so does your mortgage interest rate, and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down your monthly payment may decrease.
To determine the interest rate on an ARM, we will add a pre-disclosed amount to the index called the “margin.” If you are still shopping, comparing one lender’s margin to another’s can be more important than comparing the initial interest rate, since it will be used to calculate the interest rate you will pay in the future.
An interest rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:
- Periodic or adjustment caps, which limit the interest rate increase or decrease from one adjustment period to the next.
- Overall or lifetime caps, which limit the interest rate increase over the life of the loan.
As you can imagine, interest rate caps are very important since no one knows what can happen in the future. Our ARM product offers both adjustment and lifetime caps. Contact a lender for details.