An adjustable rate mortgage is a type of loan with what is known as a variable interest rate. In other words, with an ARM loan the interest rate can change during the course of the loan. Rates may go down as well as adjust upward, based on the terms of the loan. Most of these loans will be tied to an associated index plus a margin.
At California Mortgage Advisors Inc., we genuinely believe that we offer our customers the best mortgages in the industry. We have offered a variety of loans since 1993, which means our Mortgage Advisors have successfully matched tens of thousands of borrowers with loans tailored to meet their needs and unique financial situations. If you have questions about ARM’s, our Mortgage Advisors can explain the different types of program options and how and when the loans adjust. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to apply online.
How An Adjustable Rate Mortgage Works:
In most cases, an ARM loan will offer a low interest rate during the initial period. After the initial fixed rate period, the interest rate will adjust as according to index, margin, and the periodic adjustment caps, which are spelled out in your loan documents. Before taking an ARM loan, you should understand exactly how high your mortgage payments can go after the first, second, third adjustments and even at the life cap rate.
There are several components that make up the fully indexed interest rate. This includes the margin and the index. Obviously, the index is what changes based on economic factors. The margin, however, is a fixed factor that will not change. Simply add the index and the margin to determine what the fully indexed rate will be.
ARM Loan Interest Rate Caps:
In most cases, an ARM loan will also have interest rate caps, which essentially limits the amount of rate changes that can occur within certain time periods. There might be an initial rate cap, meaning the first adjustment will be limited. Periodic caps will help to limit the amount of an interest rate change during each period, which could be every six months or every year, depending on your specific loan.
There are also going to be (most likely) lifetime caps in the rate changes. In the full 30 years (or whatever term you have) your interest rate will never exceed or dip below a certain amount. This is nice to know since it does provide at least a bit of predictability, although that ARM loan adjustment range can mean some very wide differences in total payments.
Here is an example of how your adjustable rate mortgage might have the rate caps listed: 5/1/5. This would mean it could change a full 5% once it makes the first adjustment to an ARM loan, then 1% periodically, up to a total 5% change from the start rate throughout the life of the loan. Although they can also adjust downward, most lenders will have a floor equal to its start rate.
The Hybrid Adjustable Rate Mortgage:
The most common ARM loan today is a hybrid, meaning it has features of both an ARM loan and a fixed rate loan. The initial period will be fixed, then it can adjust. Although a variety of terms are available, the most common is still the 30 year mortgage. For example, a 5/25 adjustable rate mortgage means the loan has an initial 5 year fixed term, followed by a 25 years fully amortized adjustable rate mortgage. Always to run some scenarios on how potential adjustments could affect your payments and the breakdown of interest and principal paid and owed. Our Mortgage Advisors can assist you with understanding how an ARM loan works.
At California Mortgage Advisors Inc., we have a 20+ year track record of helping borrowers secure a variety of adjustable rate and fixed rate mortgages. We understand that the loan programs can be confusing and that’s where our professional trained Mortgage Advisors can be of assistance to you. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to apply online.