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Adjustable Rate Mortgages
1 Year Arm, 3 Year Arm, 5 Year Arm, 7 Year Arm and 10 Year Arm
How do they work?
As with all Adjustable Rate Mortgages (ARMs), the rate is tied to a certain index – most commonly the monthly average of Treasury securities with a constant maturity of one year. For the initial 1, 3, 5, 7, 10,-year period, your rate is fixed. Then after the initial fixed period the loan will follow the movement of this index up and down, with certain limits. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment. See Adjustable rate mortgage
What are the benefits of an ARM?
ARMs allow you to pay a lower introductory interest rate. They help borrowers qualify for a larger home and enjoy a lower initial monthly payment.
Example:
3-Year Treasury ARM
Index
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| Treasury
| First Adjustment
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| After three years
| First Adjustment Cap
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| 2% Maximum
| Periodic Adjustments
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| One per year after third year
| Periodic Adjustment Cap
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| 2%
| Lifetime Cap
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| 6% above initial rate
| Margin
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| 2.75%
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Index: is the published financial reference to which your loan is tied. The index is published in newspapers and is readily available on the internet.
First Adjustment: is the first time the lender has the option to adjust your rate.
First Adjustment Cap: is the most your interest rate can increase at the first adjustment.
Periodic Adjustments: are the frequencies with which your interest rate can be increased.
Periodic Adjustment Cap: is the most your interest rate will increase with each Periodic Adjustment.
Lifetime Cap: is the maximum interest rate that can be charged during the life of a loan.
Margin: is added to the index to determine the rate adjustment.
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