Adjustable Rate Mortgage or ARM
Adjustable Rate Mortgage
ARM loans the interest rate increases or decreases periodically. This may lead
to lower interest rates or, on the other hand, somewhat high rates. If the low
interest rates remain steady, the ARM could be inexpensive and low over a long
period of time. ARM loans can be tied to many types of indexes.
There are many advantages to an ARM loan.
Types of Adjustable Rate Mortgages
- Most common and lowest is the 2 year ARM or 2/28 Libor. The 2 year ARM
is fixed for 24 months.
- The 3 year ARM more is the same as the 2 year with a slightly higher
interest rate and is fixed for 36 months.
- The 5 year ARM is fixed for 60 months.
- The 7 year ARM is fixed for 84 months.
An adjustable rate mortgage is a loan secured on
land, single family resident, investment property, or business whose interest
rate can vary over time. Other mortgage loans include
interest only mortgage,
fixed rate
mortgage, and Pay Option ARM Most ARM loans are for short
term purposes; A. lower debts, B. Own for a short term and other personal
reasons. The borrower benefits if the interest rate falls and loses if
interest rates rise. Before you decide on an ARM loan you must weigh the
benefits.
After the fixed rate period the loan may adjust every six months. The first
initial can be higher than 1% after that the interest rate cannot adjust more
than 1% annually. Each ARM also has a cap on it, meaning over the life the loan
the interest rate cannot be higher than 6 or 7 percent higher than the start
rate.
How an ARM loan works:
On an ARM note with rider will tell you the type of ARM loan. The date that
the first interest rate adjustment will take place. The margin that will be used
to be part of the calculation for each change period. Where they will get the 6
month LIBOR index information to make the calculation (usually Wall Street
Journal). The CAP on the ARM loan (How much it can go up during the life of the
loan).
Sample of an ARM loan
I will use the most common the 2 year ARM. The loan amount is $100,000. The
interest start rate is 5.25%. Term is amortized over 30 years or 360 months. The
margin is 2.25% (may be different), and the current 6 Month LIBOR index is
3.53%. On the 24th month the lender will add the margin (2.25%) and current 6
month LIBOR(3.53%) = 5.88% (rounded to the nearest 1/8% (this is common). The
new interest rate would be 5.875%. Every 6 months after that it may adjust. All
ARM loans have a CAP on them, most common is 6% over start rate.
These type of loans are loans whose
interest rates, and accordingly monthly payments, fluctuate over the period of
the loan. With this type of loan, periodic adjustments based on changes in a
defined index are made to
interest rates. The
index
and margin for your particular loan
is established at the time of application.
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