What is an ARM?
An adjustable rate mortgage, or an “ARM”, is a loan type that offers a lower initial interest rate than most fixed rate loans (normally). Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. For some people, an ARM may be the right mortgage choice, particularly if you only plan on being in the home for less than three, five, seven or ten years.
Here’s some detailed information explaining how ARM’s work.
Adjustment Period: The interest rate and monthly payment are fixed for an initial time period, generally three, five, seven or ten years. After the initial fixed period, the interest rate can change every year.
Index: Interest rate changes are tied to changes in an index rate. The current values of the indices used on our ARM programs are published weekly in the Wall Street Journal (12 Month Libor) and shown on our website. At each adjustment date, if the index rate has moved up, so will your mortgage rate, and you will have to make a higher monthly payment. On the other hand, if the index rate has gone down, your rate and monthly payment will decrease.
Margin: To determine the new interest rate on an ARM, at each adjustment date, a pre-disclosed amount, called the “margin”, is added to the index to determine the new interest rate. The margin is 2.25.
Interest Rate Caps: An interest rate cap places a limit on the amount an interest rate can increase or decrease at each adjustment. ARMs have three types of caps: an initial cap, which limits the interest rate increase or decrease at the first adjustment; a periodic cap, which limits the interest rate increases or decreases at all following adjustments; and a lifetime cap, which limit the interest rate increase over the life of the loan.
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