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ARM - Adjustable Rate Mortgage

Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.

If you are currently in the tail end of the fixed period in your Adjustable rate loan, often 2 years, 3 years or 5 years after you took it out, this may be the best time to get a fixed rate mortgage refinance and lock in your rate while it is low. While mortgage rates rise and fall, the current market outlook is that they will continue to increase over the next couple of years, and you don't want to be stuck paying a lot more money for a couple of years when you have the opportunity to refinance ARM into fixed rate mortgage today.

Because the market goes up and down over the years in cycles, and people end up refinancing their current mortgage for cash-out equity every 3 to 7 years, those who use an adjustable rate mortgage as a staple for their home financing generally pay less in the short run and the long run.

Whether to choose an ARM or a fixed program has less to do with which is better and a lot to do with what will fit your situation best. Make sure you talk to a mortgage professional you trust to get great advice on what is best for you.

The difference between rates for Adjustable Rate Mortgages (ARM) and Fixed Rate Mortgages is growing ever smaller during this economic cycle.

There are many Adjustable Rate Mortgage products available today. Some ARM products have rates that adjust immediately the following month after settlement, others have an initial fixed rate period of 1, 3, 5, 7, or 10 year. ARMs that have an initial fixed interest rate period are also known as Hybrid Loans.

When choosing an ARM product, it is as important to consider the underlying indices and margins as picking the lowest teaser rates. Different indices have different sensitivity to the interest market. In other words, some indices such as Treasury bills and LIBOR are highly sensitive to market conditions and adjust rapidly. The 11th District Cost of Funds Index, also known as COFI, tends to move slower in comparison and therefore less volatile.

ARM products almost always have an initial interest rate that is lower than that of fixed rate products of the same loan term. These lower starting rates, also referred to as Teaser Rates, are meant to induce/reward borrowers who are willing to bear some of the risks of future interest rate movements.

ARM's are great for keeping your payment down for a fixed period of time while you work on your FICO score and aim for a better fixed rate down the road.

Some ARM loans have an interest only option. These loans are very popular with people who do not plan on staying in the home for a long period, want to qualify for a larger home and investment properties to increase cash flow due to the lower payments.

Other ARM product features that need to be considered include the Period Adjustment Caps which limits the maximum rate change allowed at an given adjustment, the Floor, which is the lowest possible rate of the loan, regardless of the value of the underlying index, and the Life Time Cap, which sets a ceiling for the maximum rate of interest throughout the life of the loan.

An ARM, short for "adjustable rate mortgage", is a mortgage on which the interest rate is not fixed for the entire life of the loan. The rate is fixed for a period at the beginning, called the "initial rate period", but after that it may change based on movements in an interest rate index.

The ARM rate quoted by a lender or broker is the initial rate. It holds until the end of the fixed-rate period, which can last from a month to 10 years. This rate is critically important if the initial rate period lasts for 10 years, but it is very unimportant if the period is only one month.

On the most popular ARM program, the initial rate period is 12 months, and on more than half the period is 36 months or less. While you can always opt for an ARM with a longer initial rate period, the rate goes up as the period lengthens. If you need the rate on a one-year ARM to qualify, you must consider very carefully what happens after the fixed-rate period ends.

ARMs are great loans if you plan on moving in the future. For example if you are going to move in five years a five year arm would offer a lower interest rate and save you money each month.

For most folks a 30 year mortgage is overkill. They will refinance again inside of the next 5 years. Why take such a higher rate for a 30 year mortgage if you're going to refinance? Adjustable Rate Mortgages allow you the flexibility you deserve when taking a loan.

An adjustable-rate mortgage (ARM) with an initial fixed-rate period of pre-determined years, during which the borrower is may have an option to pay only the interest accrued on the loan. The interest rate then adjusts annually or bi-annually, based on the indexes such London Inter-Bank Offered Rate (LIBOR) index, and can move up or down as market conditions change.

Over time the adjustable has outperformed the fixed rates. I would like the opportunity to show you which will be best for your goals.

ARMS have caps so the borrower is protected by a maximum adjustment the lender can make over the term of the loan. This information should be clearly identified in the Truth in Lending statement (TIL) which should be given with the Good Faith Estimate (GFE).

ARM loans come with different initial fixed rate periods such as 1 2 3 or 5 year fixed. After the initial period they will start to adjust according to the index they are tied to. What's nice about ARM loans is it allows the borrower to have a lower payment initially. These type programs can be used for many reasons, one of them being for someone who won't be living in a property for an extended period of time.

An ARM (Adjustable Rate mortgage) is a nice option for people who have a second home and want to have the lowest payment possible on that property for a certain period of time. ARM's also work well with investment properties to help keep the payments down so that the investor can maximize overall cash flow. There are many different types of ARM's available. There are 1,2,3,5,7, and 10 year ARM's. There are interest only ARM's also. These ARM's are fixed for a set period of time and work the same exact way as a regular ARM, however you are only required to make the interest only portion of the payment. This is a great feature for investors and for anybody who really wants to maximize their cash flow. There are ARM's that fluctuate monthly, semi-annually, and yearly. It is very important to ask questions about the type of ARM you are going to be placed into.

When financing with an Adjustable Rate Mortgage (ARM) make sure that you do not have a pre-payment penalty that is longer than the fixed period of your loan. You do not want to be in a two-year ARM and have a pre-payment penalty that lasts for three years.

If you do have a loan with a pre pay penalty ask if it is a hard or soft pre pay. A soft pre pay will allow you to sell the house with no penalty. A hard pre pay requires you to pay the penalty if you sell or refinance the mortgage before the pre pay expires. Pre pay penalties will vary in the amount required from 60 days interest to six months interest.

In addition to caps, which limit how high the interest or payment can adjust, most ARM mortgage loans have floors, which limit how low the interest rate can go.

The initial interest rate for an ARM is lower than that of a fixed rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan.

There's couple of questions that is very important when considering the ARM:

How long do you plan to own the house? The possibility of rate increases isn't as much of a factor if you plan to sell the home within a few years.

Do you expect your income to increase? If so, the extra funds might cover the higher payments that result from rate increases.

Some ARMs can be converted to a fixed-rate mortgage. However, conversion fees could be high enough to take away all of the savings you saw with the initial lower rate.

An adjustable rate mortgage, called an ARM for short, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.

If you are considering an adjustable rate mortgage, make sure you do the research. Find out how often the rates can increase and by how much. Try to determine whether you can afford payments if the rates go up significantly over the next few years.

Whether you are purchasing or refinancing, and want to know more about what type of loan may be best for your situation, please do not hesitate to contact me.

"American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage,...To the degree that households are driven by fears of payment shocks, but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

- Alan Greenspan, the Chairman of the Federal Reserve Board at the Credit Union National Association 2004 Governmental Affairs Conference

Most lenders tie ARM interest rate changes to changes in an "index rate." These indexes usually go up and down with the general movement of interest rates. If the index rate moves up, so does your mortgage rate in most circumstances, and you will probably have to make higher monthly payments. On the other hand, if the index rate goes down your monthly payment may go down.

Lenders base ARM rates on a variety of indexes. Among the most common are the rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. A few lenders use their own cost of funds, over which--unlike other indexes--they have some control. You should ask what index will be used and how often it changes. Also ask how it has behaved in the past and where it is published.

Most pay option arms use index's that are averaged over the past 12 months history to determin the rate (index + borrowers margin). That way, if a rate changes one month drastically, it is still averaged out over the 12 most recent months, so any changes to the borrowers indexed rate will be minimal, and even if the trends are showing that the index is doomed, it is still averaged so that gives the borrower enough time for a worst case scenario "out" to refinance in the case of a disaster.

Adjustable rate mortgages or ARMs have Interest Rate Caps.
Rate caps limit how much interest you can be charged over a period or over the life of a loan.

A Periodic rate cap limits the amount by which your interest rate may increase at the adjustment period(s). Only some ARMs have these period caps.

Overall or lifetime rate caps limit how much rate can change over the life of the loan. Lifetime or overall caps are required by law and have been required by law since 1987 on all Adjustable rate mortgages.

A mortgage loan where the interest rate is not fixed for the entire term of the loan, and can change during the life of the loan in line with movements of an index rate.

If your ARM has started to adjust, it might be a good idea to refinance into a fixed rate loan.

2/28 ARM is a great product. Especially for 1st time home buyer or sub prime borrower. It allows one to strengthen credit over the two year period.

An Adjustable Rate Mortgage (ARM), will carry a lower initial interest rate than a typical 30 year fixed rate mortgage. The lender is hoping that you will forget about the adjustment, and just continue to hold on to the loan. Be aware of when your loan is due to adjust, as well as by how much it will adjust.

If one or more of these situations describes you, an ARM might be a good fit:
-You plan to stay in your home for a relatively short period of time
-You want lower initial monthly payments and can handle potential payment increases in the future
-You want to qualify for a larger mortgage amount, and you expect your income to go up over time

It has been shown, that home owners would have saved thousands of dollars if they had a ARM of a conventional 30 year fixed.

When should you take an ARM mortgage vs. a traditional 30 year fixed?
Consider how long you plan on occupying the property. If it is for 10 years or more then a 30 year fixed may be the best bet when interest rates are low. However, if you plan on moving sooner then consider the extra savings you will achieve by choosing an ARM.
For example, you plan moving when your child is old enough to go to school in three years. The best financial choice would to get a 3 year or possibly a 5 year ARM. When a 30 year fixed mortgage is around 5.875% a 5 year ARM is around 5.25% and a 3 year ARM would be about 5.00%. On a $200,000 loan the monthly payments would be $1183 for a 30 year, $1104 for a 5 year ARM, and $1073 for a 3 year ARM. Times that by 3 years, 36 months, and your savings for an ARM vs. a 30 year fixed would be between $2800 - $3900. Money better spent elsewhere.

If you only plan on living in your home for a few more years, it might not be worth it to move from a program like a low rate ARM or an Interest Only Program to a traditional Fixed Rate loan. There may be better things to put your money towards each month that putting a few extra dollars towards the principal of your home.


If you have any questions regarding our products, you can contact us by calling or e-mailing us and we'll get back to you as soon as possible. Thanks!



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