Adjustable Rate mortgages
These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions.
The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable-rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan’s term. from 1 month to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans typically range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).
Adjustable Rate mortgages Process
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When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called “caps”. Suppose you had a “3/1 ARM” with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.
- An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can fluctuate periodically based on the performance of a specific benchmark.
- ARMs generally have caps that limit how much the interest rate and/or payments can rise per year or over the lifetime of the loan.
- An ARM can be a smart financial choice for homebuyers who are planning to keep the loan for a limited period of time and can afford any potential increases in their interest rate.
