Adjustable Rate Mortgages
An Adjustable Rate Mortgages or ARM loan is a mortgage that comes with a flexible interest rate. These are also known as floating rate mortgages whose percentages fluctuate according to financial indexes.
An adjustable rate mortgages loan would start off with an introductory interest rate. After that, the interest rate lasts for a specific period of time and adjusts on a yearly basis. The time period lasts for thirty years. Monthly payments are subject to caps and will change along with your interest rate over a specific period of time.
ARM home loans are great opportunities for borrowers who intend to sell their homes in the not so distant future. Investors who typically flip and sell the house in a short period of time usually take Adjustable Rate Mortgage. They are also attractive since the initial rate for most ARM home loan is slightly lower than conventional 30 year fixed mortgage.
Adjustable Rate Mortgages (ARM) payment is the combination of the index + the margin. This is what is called the Fully Indexed Interest Rate, the combination of the index and margin.
The index is the benchmark interest rate, which the ARM is tied to for the life of the loan. The Index is variable and not fixed.
The Margin is constant or fixed throughout the life of the loan. It is added to the Index to determine the fully indexed interest rate of the Adjustable Rate Mortgage.
Adjustable rate mortgage adjust on an annual basis. ARMs come in hybrids like one-year, six months, two years and other yearly categories. One of the most popular carries a fixed rate for five years. This is called the 5/1 ARM. As the name implies, this particular adjustable rate mortgage carries a fixed rate for five years, after which the rate adjusts on a yearly basis throughout the life of the loan. Other popular hybrids include 3/1, 7/1 or 10/1. Like the 5/1 ARM hybrid these types of loans have fixed rates during the first three, seven or ten years after which they are annually adjusted.
Caps or cap limits determine how much the interest rate can increase. The most common ARM caps are the: Initial Cap, Periodic Cap and Lifetime Cap. “Initial Cap” limits how much the interest rate can increase at the first adjustment. “Periodic Cap” limits how much the interest rate can increase each subsequent time after the initial adjustment. “Lifetime Cap” sets the maximum amount by which the interest rate can adjust for as long as the borrower keeps the mortgage loan.
Not all ARM’s are the same; not all ARM’s have an Initial Cap that’s different from the Periodic Cap. Rule of thumb to use is, if the loan has an Initial Cap, it is likely higher than the Periodic Cap. If there is no Initial Cap, the Periodic Cap applies to the first adjustment and any other subsequent adjustment, thereafter.
Interest Only Adjustable Rate Mortgages
Interest only ARMs are mortgages that require borrowers to pay only in interest for a specific period of time. These often last for 10 years. After that time, the loan adjusts to current interest rates, according to a specific financial index after which the adjustable rate home loan amortizes faster.
Types of Caps
The payments depend on the rise and fall of Index base. For example, borrowers in Houston will have to pay more if the current rates for Texas or for that specific area are high. Similarly, the lower the Index are, the lower your payments will be.
There are also some ARMs that come with conversions. Convertible adjustable rate mortgages can be converted into a fixed rate mortgage. Ask AMCAP Mortgage if your ARM can do so. Our Home Loan Specialists can help you choose a loan option that suits your needs the best.