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An adjustable rate mortgage loan (ARM) generally begins with an interest rate that is 2-3 percent below a comparable fixed rate mortgage. This could allow you to buy a more expensive home.
However, the interest rate adjusts at specified intervals (for example, every year) depending on changing market conditions. If interest rates go up, your monthly mortgage payment will also go up. If rates go down, your mortgage payment will drop.
There are also mortgages that combine aspects of fixed and adjustable rate mortgages — starting at a low fixed-rate for 7-10 years, for example, and then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation.
Contrary to popular myth, there is nothing wrong with an adjustable mortgage loan. It is a tool in the tool box. It is a great loan product for some, and to be avoided by others.
Feel free to call us at (651) 552-3681 to discuss if an adjustable loan is right for you!
Introductory Rate ARMs
Most adjustable rate loans have a low introductory rate or start rate, sometimes as much as 5.0 percent below the current market rate of a fixed loan. This start rate is usually good from one month to as long as 10 years. As a rule, the lower the start rate, the shorter the time before the loan makes its first adjustment.
Interim Caps
All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six months or a year. There are also loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Index
The index of an ARM is the financial instrument to which the loan is “tied” or adjusted. The most common indices or indexes are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds (COFI). Each of these indices moves up or down based on conditions of the financial markets.
Lifetime Caps
Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Loans that carry low margins often have higher lifetime caps.
Margin
The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate you pay. The margin added to the index is known as the fully indexed rate. For example, if the current index value is 5.50 percent and your loan has a margin of 2.5 percent, your fully indexed interest rate is 8.00 percent. Margins on loans range from 1.75-3.5 percent depending on the index and the amount financed in relation to the property value.
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33 Wentworth Ave E, West St Paul, MN 55118
(651) 552-3681
Loans@Mortgage-Duluth.com
Cambria Mortgage NMLS# 322798. Equal Housing Lender. We lend in the following states: Minnesota, Wisconsin, Iowa, Colorado, Florida, North Dakota, and South Dakota. This is not an offer to lend or to extend credit, nor is this a guaranty of loan approval or commitment to lend. The information here may not be up-to-date and may no longer be accurate. Products and interest rates are subject to change at any time due to changing market conditions. Actual rates available to you may vary based upon a number of factors. Consumers must independently verify the accuracy and currency of available mortgage programs. All loan approvals are subject to the borrower(s) satisfying all underwriting guidelines and loan approval conditions and providing an acceptable property, appraisal and title report. © 1998 - 2023, Joe Metzler, NMLS 274132