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| Adjustable Rate Mortgages |
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How does an Adjustable Rate
Mortgage work?
What are the advantages of an ARM?
How will the changes in interest
rates affect me?
What do they base the interest rate
on?
How high can the interest rate go?
Are there any hidden traps in ARMs?
Can I convert my ARM to a fixed
interest loan later?
Additional Terms
How does an Adjustable Rate
Mortgage work?
An Adjustable Rate Mortgage (ARM) allows the interest
rate to change at specific adjustment intervals over the term of
the loan. Interest rate declines and increases are based on the financial index (indice) used by the lender and are limited by other provisions of
the loan. [top ^]
What are the advantages of an ARM?
Typically, adjustable rate mortgages are seen to have
two strengths. First, adjustable rate mortgages tend to less expensive over the life
of the loan, than fixed rated loans, especially early on. This is because the lender
is willing to charge a lower rate because the borrower shares some of the risk should the
rates go up.
With an ARM, you can generally qualify for a higher loan balance, with more flexible provisions, than you would with a fixed rate mortgage. This is because the interest rate during the first year of the loan is usually lower.
Consider an ARM if...
How will the changes in
interest rates affect me?
Adjustable rate mortgages have an interest rate that
increases or decreases over the life of the loan based upon market conditions. A
financial index (indice) governs the changes in the interest
rate. When the index rises, so will the interest rate of the ARM. When the index
falls, the interest rate of the ARM will decrease. Payment amounts may also
fluctuate with an ARM, and the decrease in the loan balance will not be as predictable as
with a fixed rate loan. [top ^]
What do they base the interest rate on?
There are different indices
to which an ARM may be linked, for instance: The Federal Home Loan Bank Board's national
average mortgage rate, or the U. S. Treasury rate. Generally, the more sensitive the
index is to market changes, the more frequently the rate can increase or decrease. [top ^]
How high can the interest rate go?
Most ARMs have semi-annual or annual caps that limit
the amount your interest rate or payment can go up or down during that period. An
additional protection is a lifetime cap that limits the amount your interest rate can
adjust over the life of the loan. [top ^]
Are there any hidden traps in ARMs?
Be cautious if the initial interest
rate on an ARM loan is considerably less than that offered by other lenders. Ask
about anticipated interest rates during the second and third years of the loan, and find
out if rates could change even if the financial index (indice)
stays the same. [top ^]
Can I convert my ARM to a fixed interest loan later?
A convertible ARM loan allows you, for a fee and after
an initial waiting period, to convert your ARM to a fixed rate loan. Conversion
details and availability of this loan vary. [top ^]
Financial Index
An agreed upon basis for making interest rate changes
on an adjustable rate mortgage. One example of a financial index could be the change
in cost of U.S. Treasury Bonds. (see indice)
Indice
Read about indices at the
linked page.
Adjustment interval
On adjustable rate mortgages, the periods of time
between changes in either the interest rate or monthly payment (for example, one
year). Intervals vary depending on the type of loan and lending institution.
Initial interest rate
The interest rate charged for the first six or 12
months of an adjustable rate mortgage (before the first interest rate adjustment). [top ^]
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Now Mortgage
Services, Inc.
1-509-783-9091
1-800-326-1303
8500 Gage Blvd. Suite C
Kennewick, WA 99336
Copyright 1998 by CyberTech Computer Services