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Adjustable Rate Mortgage Information


Adjustable Rate Mortgages or (ARM)’s are loans whose interest rate can vary during the loan’s term. These loans have a fixed interest rate for an initial period of time (usually 3, 5, 7, or 10 years) and then typically adjust on a yearly basis. The initial rate on an ARM is usually going to be lower than than what is offered with a 30 Year fixed mortgage and can be advantageous if you plan on being in your home with a timeline of one to ten years.

Advantages Of An Adjustable Rate Mortgage

This lower interest rate can save you hundreds if not thousands of dollars in payments per month and over time usually performs better than a typical 30 year fixed rate mortgage. With an adjustable rate mortgage you do not have to pay for the ability to fix the rate for a full 30 years as you do with a 30 year fixed mortgage. You only pay for a fixed rate for as many years as you need it, no more.

Adjustable rate mortgages also give you the ability to make interest only payments. Interest only payments can significantly lower your monthly payment.


Adjustable Rate Mortgage Amortization

Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All adjustable rate mortgages have a “margin” plus an “index", which makes up the "fully indexed" rate. This is the end rate you pay expressed as 6.25% or whatever it turns out to be when your initial fixed period of 1 to 10 years has ended. Again, you choose how long this initial fixed period is. You make it only as long as you will need it, and therefore get a lower rate. Margins on loans range from 1.5% to 4.5% depending on the index and the amount financed in relation to the property value, otherwise known as the "Loan to Value" of the home. The index is the financial instrument that the adjustable rate mortgage 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). A complete list of these indexes can be found here.

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Alan Greenspan Speak About Option ARM Home Mortgage Loans

Adjustable Rate Mortgage Adjustment

When fixed period of 1 to 10 years is completed, 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 for that adjustable rate mortgage. This adjustment will typically occur on a yearly basis. There are factors limiting how much the rates can adjust 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 5.25%. 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 11.25%. People will refinance their home loan into another fixed loan before this occurs so that they can retain the ability to have a fixed rate. These caps determine how high the rate can go, but most people never reach this period in their loan because they have renewed the fixed period by refinancing into a new loan.

Option ARM Home MortgageApply Now
Alan Greenspan Speak About Option ARM Home Mortgage Loans

What components make up an Adjustable Rate Rate Mortgage?

Adjustable Rate Mortgage Components

Adjustable Rate Mortgage Indexes


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