ARM - Adjustable Rate Mortgages

An Adjustable Rate Mortgage (ARM) has a starting interest rate that is fixed for a predetermined period of time and then at the end of that period the rate fluctuates for the remaining term of the loan. This often has lower monthly payments, and it also has a ceiling above which payments cannot go.

Fixed Rate Period

The fixed rate period can last for a variety of different time periods: 1, 2, 3, 5, 7 or 10 years depending on what loan best suits your situation.

The rate at which the loan starts at (start rate) is also the lowest that the rate will ever go over the life of the loan (floor rate). Most ARM's have a total term of 30 years.

Index

The Index is the variable that the interest rate is tied to during the adjustable rate portion of the loan term. Any change in the interest rate can be attributed to a change in the index assigned to the loan.

There are a couple reasons why a customer would want an adjustable rate mortgage:

Borrower only plans to stay in his/her home for a short period of time.

• The homeowner may have a job that relocates him/her from time to time
• The homeowner has bought a starter home
• The homeowner plans on refinancing in the future
• Everything else equal, an ARM has a lower starting interest rate than a Fixed Rate Mortgage, which will allow a homeowner a lower monthly payment or a higher loan amount.

Borrower has damaged credit and needs to refinance.

• A homeowner who has damaged credit can consolidate all of his/her debt into one mortgage. If the borrower agrees to an ARM he/she can get a relatively lower interest rate and make payments during the fixed rate portion of the loan and then refinance.
• Because the credit scoring model has a "short term memory" and can be repaired after 1 or 2 years, an ARM is perfect for someone wishing to clean up his/her finances. When the adjustable rate portion of the loan occurs the borrower will have the incentive to refinance again with hopefully clean credit into a more long term fixed rate loan.

Adjustable-rate mortgages (ARMs) are loans with interest rates that change. ARMs may start with lower monthly payments than fixed-rate mortgages, but keep the following in mind:

• Your monthly payments could change. They could go up--sometimes by a lot--even if interest rates don't go up.
• Your payments may not go down much, or at all--even if interest rates go down.
• You could end up owing more money than you borrowed--even if you make all of your payments on time.
• If you want to pay off your ARM early to avoid higher payments, you might have to pay a penalty.

Find out if an ARM Loan is right for you. Take a moment to fill out an application or call to speak with an experienced Mortgage Consultant today.