Adjustable Rate Mortgage (ARM)
An adjustable Rate Mortgage (ARM) also called a variable-rate mortgage is a mortgage loan where payments will fluctuate over time. The initial interest rate will be lower than that of a fixed-rate mortgage; however, changes in the market could result in increased interest rates, which will ultimately affect the monthly payments.
For borrowers whose income may go up, an adjustable-rate mortgage might be the best option because of early lower payments. Some loans are fixed for a certain period, and then they turn into adjustable-rate loans. For example, a 3/1 ARM loan offers a fixed rate for the first three years, adjusting once a year thereafter. A 5/1 ARM loan offers a fixed rate for the first five years, adjusting yearly thereafter.
In ARM, the interest rate on the note is periodically adjusted based on an index that reflects the cost to the lender of borrowing on the credit markets. Among the most common indexes are:
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The 11th District Cost of Funds Index
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The Treasury Bill Index
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London Interbank Offered Rate (LIBOR) based indexes
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Constant Maturity Treasury (CMT)
For the borrower, adjustable rate mortgages may be less expensive, but at the price of bearing higher risk. Many ARMs have "teaser periods", which are relatively short initial fixed-rate periods (typically one month to one year) when the ARM bears an interest rate that is substantially below the "fully indexed" rate. The teaser period may induce some borrowers to view an ARM as more of a bargain than it represents. A low teaser rate predisposes an ARM to sustain above-average payment increases.
Ask our Loan Originator about these and other special kinds of mortgages that fit your specific financial situation.
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