ARM's Explained - ARM is an acronym for adjustable rate mortgage. ARM's are mortgage that are tied to a certain index, and will adjust at different periods based on certain economic factors.
Since the American homeowner usually refinances within 7 years, an ARM is sometimes the best mortgage in which to get started.
Some loans have a "cap" on the payment increases, not the interest rate increases. Option ARMs are a good example of this - generally your payment cannot increase more than 7.5% per year. $1000 per month the first year, $1075 the second year and so on.
Most interest only loans are made on an ARM loan. Such as a 3/1 Interest Only ARM. Even though most interest only loans are interest only for the first 5 or 10 years of the loan, this 3/1 I.O. ARM would be fixed for the first 3 years, or for the first 36 months, and then adjust thereafter. Interest only ARM's are a great way to lower your payment and your interest rate.
Most ARMs have a period where the rate is fixed. The fixed rate period can be anything from a couple months to 10 years. Most common ARMs are fixed for the first 2, 3, or 5 years.
Rate adjustments are always "capped", or limited by how much they can increase per adjustment period. For example, many ARMs have a " life cap" of 6%, meaning that a start rate of 5% can never adjust to higher than 11%.
Adjustable rate mortgages are also called variable rate mortgages or hybrid mortgages.
All Adjustable Rate Mortgages (ARM) have interest rates that are based on an index and a margin. The index is always some widely published interest gauge, such as the T-bill, LIBOR, COFI, etc. The margin is added to the index to determined the mortgage note rate.
What are caps on an ARM? - If you have an adjustable rate mortgage (ARM), or are considering one you have probably heard the term "caps" mentioned. The caps control how much your interest rate can change at each rate adjustment. The different types of caps are:
- Initial Cap
- Interim Cap
- Lifetime Cap
Initial Caps are the limits placed on the first interest rate adjustment. On the mortgage agreement you signed at settlement, there is a paragraph that states the interest rate at the first adjustment date would not be greater and lower than a certain range.
Interim Caps are limits on how much your rate can go up each time it adjusts. For example your rate couldn't go up more than 1% each time after the initial adjustment.
Lifetime Caps are limits on home much your rate can go up over the life of the loan. This gives you an idea of your "worst case scenario".
(ARM) Adjustable Rate Mortgage - An Adjustable Rate Mortgage is a loan in which the interest rate varies at predetermined intervals in step with the movements of an agreed upon external index rate for some portion of the life of the loan.
For customers who plan on living in their home for less than 5 to 7 years, adjustable rate mortgages, particularly fixed/adjustable hybrids are often an excellent option.
Today's Adjustables lock in lower rates for longer than ever before, so you can fix that low initial interest rate for 5 years or more.
Adjustable Rate Mortgages or ARM mortgages are an excellent choice for your first home purchase, for growing families, and for building up credit.
A mortgage in which the interest periodically "adjusts", according to various fluctuations in an index. All ARMs are tied to indexes. Common indexes are T-Bill, MTA, COFI, COSI, CODI, & LIBOR.
It will be in your best interest to refinance the ARM before it begins to adjust. Although there areinterest rate caps on the amount of the first rate adjustment, once the ARM begins to adjust your payent will more then likely increase.
Adjustable rate mortgages often have lower initial interest rates and payments.
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Information listed above is to be used for educational purposes only and is not guaranteed