ARM - Adjustable Rate Mortgage
What Is An ARM - Adjustable Rate Mortgage?
An ARM is an Adjustable Rate Mortgage. ARMs have different advantages and disadvantages when compared to fixed rate mortgages. Unlike their counterparts—the fixed rate mortgage—that have an interest rate and payment that remain the same for the duration of the mortgage, the interest rate and payment of an ARM loan can adjust. By design, the ARM typically has a fixed period for the first few years—whether that is 3 years, 5 years, 7 years, or 10 years. After that initial fixed period, the ARM will begin to “adjust” in terms of the payment and the rate. This adjustment will happen periodically depending on the terms of the mortgage, and can happen every 6 months, for example, or once per year.
Typically, the initial interest rate of an ARM is lower than a fixed rate mortgage. That’s often why borrowers prefer them. This provides borrowers with a lower payment for the first few years—whether it be 3, 5, 7, or 10 years. This makes much sense for borrowers who only expect to be in the home for a few years, or who project a huge uptick in income and future earnings.
The design of an ARM loan has a few components. They are: an index, a margin, a rate cap, and an initial fixed rate period. The index can range from LIBOR to MTA to COSI to COFI. This is simply the baseline by which the mortgage is factored. The index will be the spread between the index and the fully-indexed rate. The index plus the margin will equate to the actual nominal rate. So, for example, if LIBOR (the index) is at 1.5% and the margin is at 2%, the fully-indexed rate is 3.5% (i.e. 1.5% plus 2%). The rate cap is the maximum rate the loan can adjust to. And lastly, the initial fixed rate period simply determines the length of the fixed duration before the loan begins to adjust, also known as “float”.
ARM loans are unique and must be carefully considered. While they have good benefits, they also have some inherent risks. Contact MortgageLoan Corp. for an assessment of your fixed rate mortgage options as well as your adjustable rate mortgage options.
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