Adjustable Rate Mortgage - The adjustable rate mortgage or ARM is a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. The index could be for example the one year treasury, cd rates or even cost of funds as measured in a defined geographical area. Also referred to as the variable rate mortgage.
A few options are available to fit your individual needs and your risk tolerance with the various market instruments.
ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.
The interest rate and monthly payment can change based on adjustments to the index rate.
6-Month Certificate of Deposit (CD) ARM
Has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.
1-Year Treasury Spot ARM
Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
Has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
Has a maximum interest rate adjustment of 2% every 12 months. The treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
Some sub prime ARMS have a pre pay penalty attached to them.If you are quoted a ARM with a pre pay penalty ask if it is a hard or soft pre pay. A soft pre pay will allow you to sell the house with no penalty. A hard pre pay requires you to pay the penalty if you sell or refinance the mortgage before the pre pay expires. Pre pay panalties will vary in the amount required from 60 days interest to 6 months interest.
Cash flow ARM and Option ARM programs, also known as pay option arm or 12 month MTA mortgages, are another type of adjustable rate mortgage which gives you the option to defer interest and pay an effective 1.00% start rate on your mortgage.
Generally, when you select to finance your mortgage on an ARM (Adjustable Rate Mortgage) you will want to make sure that your pre-payment penalty does not exceed the fixed period of your loan. Example: If you plan on only living in the house for 2-3 more years and you select a 3/1 ARM, you probably do not want to have a pre-payment penalty that lasts for 5 years.
An Arm is a good loan type for people who want to get into a bigger house right now with an upfront lower payment. It is especially good for: those who know their income will increase within the next few years but don't want to wait 2 years for this house, those families that are supported by only one income but the other is preparing to go back to work, and those who want to maximize their cash flow during the first few years of moving into a new house.
A mortgage which has an start rate that adjusts periodically, according to an index. Payments will be low, when interest rates are low and will increase as rates rise. CAPS limit the ARM rate & can adjust during the term of the loan. Most ARM rates are lower than fixed-rate.
The adjustable rate mortgage tends to rise with the initial rate adjustment period. It is the lowest on ARMs with initial rate periods of a year or less, and highest on the 10-year version, which comes closest to an Fixed rate mortgage.
A convertible ARM is one that gives the borrower the choice to convert to a fixed rate mortgage at a certain time. This has an advantage over refinancing in that there are not additional settlement costs.
An adjustable rate mortgage, also known as an ARM, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes. Ask a Mortgage Professional if a ARM is right for you?
An adjustable rate mortgage or variable rate mortgage is a loan secured on a property whose interest rate and monthly repayment vary over time.
Adjustable rate mortgages that have a fixed periods for 3, 5, 7, or 10 years are often called Hybrids. They adjust after the fixed period ends.
Hybrid programs are an excellent way to keep your payment lower if you plan to refinance or sell the home in just a few years.
The interest rate on ARM's are made up of two components, the index and the margin. When choosing between different ARM programs, it is prudent to understand the volatility of the underlying indices as well as the margins.
Adjustable rate mortgages are also great for those that have poor credit and are consolidating debt. The adjustable rate will allow you to consolidate your bills and give you the lowest payment that you qualify for while you allow your credit scores to rise. Once they are higher, most borrowers will refinance into an even better rate, or into a fixed rate loan.
A very common index used in calculating Adjustable interest rates is the LIBOR index. When your mortgage adjusts, you can figure out your new interest rate by adding the margin to the LIBOR rate. Check your loan documents to be sure you are using the correct index.
3/27 Adjustable Rate Mortgage - A 3/27 ARM is a mortgage that is initially a fixed rate (for the first 3 years), and then adjusts for the next 27 years. During the 3 year fixed period, the rate will not change, and neither will your monthly payments.
The 3/27 mortgage gives you a longer period of fixed payments but comes with a slightly higher rate than a 2/28 arm would.
The 3/27 ARM, or adjustable rate mortgage is a home loan that is fixed for the first 36 months and then it becomes adjustable thereafter. After the initial fixed rate period of 3 years the rate will adjust usually every 6 months, semi-annually, or every 12 months, annually. The 3/27 will have some rate caps meaning that the rate cannot go any higher than a certain amount and any lower than a certain amount but you will need to check with your mortgage professional to find this information out beforehand.
Many home buyer with bad credit history use 3/28 ARM's, with the intention of repairing their credit profiles before the three years fixed rate period is up and refinance to a permanent mortgage with a lower interest rate.
The 3/27, like all ARMs, still is amortized over the full 30 years. Which means your payments are figured by using the full 30 year term. Many consumers have a tendency to get this confused. It is basically the same as a 30 year fixed, for the first 3 years, and then it will adjust.
A 3/27 ARM is usually .1-.25% higher then a 2/28 ARM. If you intend to refinance within 2 years you may be better off with a 2/28 ARM and the lower payment it carries.
The 3/27 ARM often has a prepayment penalty associated with it. If you think you may be in a position to pay the loan off sooner, you may want to negotiate a shorter prepay or consider a 2/28.
A 3/27 Adjustable Rate Mortgage ARM is typically safer than the more popular 2/28 Adjustable Rate Mortgage ARM because it gives you one year longer for your fixed rate period.
2/28 Adjustable Rate Mortgage - A 2/28 arm is a mortgage that has a fixed rate for the first two years, and then the interest rate adjusts for the next 28 years. This completes the full 30 year term of the loan.
These types of mortgages help make the payment lower than a traditional 30 year fixed. You will want to make sure you understand the cap limits and margin so that you are prepared for the first adjustment. Your fully adjusted rate will be the current index plus the margin which was set at the closing of your loan.
The 2/28 is used quite often as a "band-aid", or 2 step type of loan. What is meant by this is, many people who are put on a 2/28, are put on the loan as a temporary thing with the intention of refinancing in the next 2 years. These types of loans are used quite often by sub-prime lenders to get borrowers into a home at a lower rate and payment upfront for the first 2 years, and then once a borrower has had a chance to establish more credit or repair their credit they can look into qualifying for a mortgage with a great fixed rate.
Because the initial interest rate of a 2/28 is often lower than a 30-Year Fixed Rate Mortgage (FRM), many property investors who look to sell the house within the next years usually prefer the 2/28 ARM. These types of home buyers often know that they would not keep the mortgages beyond the 2-year fixed rate periods.
When you are purchasing a home, the 2/28 is often times used as an 80/20. The 2 year ARM is the 80%, and the 20% is often times a 15 year fixed with a 30 year amortization (balloon payment). The 2/28 is great for 100% purchase transactions.
Verify the pre-payment penalty term when closing.
2/28 ARMS will have a ceiling rate that is often times upwards of 13%. This means that your rate could potentially go as high as the ceiling rate over time if you do not refinance out of the mortgage.
Some lenders will offer the broker a rebate if the prepay is longer then the 2 year term. Make sure you work with an honest mortgage professional.
The 2/28 loan is what they call a hybrid mortgage. It's a combination of the fixed rate and adjustable rate mortgages.
Make sure that you do not have a 2/28 ARM with a 3-year pre-payment penalty. You will have to pay the prepayment penalty if you want to refinance after the 2-year fixed interest period.
The 2/28 ARM is considered a temporary loan and is very commonly offered by the subprime mortgage lenders. If you have never owned a home before, and your credit is less than perfect, the 2/28 ARM might be your only choice to get you out of the renting rat race and into a home. Most people refinance out of the 2/28 ARM after the end of the 2 years into a better low mortgage rate loan.
Why Should I Get An Adjustable Rate Mortgage? - Many borrowers are given an adjustable rate mortgage (ARM) but often times this type of mortgage may not be right for them. The interest rates on Adjustable rate mortgages fluctuate depending on which index is being used to calculate the rate. The typical adjustable rate mortgage (ARM)often have fixed periods of 2 to 5 years where the rate stays the same. However, after these fixed periods the rate may jump substantially. Borrowers should only get into an ARM after thinking it over very carefully.
If you know that you will be living in the subject home for a long time, an Adjustable Rate Mortgage (ARM) is usually not a good option. Fixed Rate Mortgages (FRM) are often better for home buyers who will be keeping the mortgage for most part of the loan term.
If you know you will be living in the home for only a couple years, or you will be refinancing within the next few years, an ARM loan may be your best option. They generally have a lower interest rate than fixed rate mortgages, during the initial fixed period. A lower rate means a lower monthly payment.
Make sure that you fully research your options with ARM's. If you plan to sell in four or five years, a 2 year fixed loan would probably not be best for you. On the other hand, a 30 year fixed might have too high of an interest payment, while a 5 year fixed ARM sounds just about right.
If you are getting an Adjustable Rate Mortgage then you will want to make sure that you know how your mortgage will adjust. For instance some mortgages can adjust up to 5-6 percent after the initial fixed period meaning that your payment could dramatically increase right away instead of gradually increasing. So make sure to ask what your caps, margin and index are for your ARM.
Adjustable Rate Mortgage Calculations - Calculating the current interest rate for an Adjustable Rate Mortgage requires information found on your ARM rider usually attached to your mortgage.
Basically an ARM, also known as an adjustable rate mortgage, rate is calculated by adding your index rate, which will be based on Prime, LIBOR, COFI, MTA, etc... and your margin. This will determine your interest rate. Your margin is a fixed number that will not change and is simply added to your index rate. Your index rate is the part of the rate that adjusts each adjustment period.
ARM loans, and fixed rate loans as well, which allow a borrower to defer interest for the first few years will have anegative amortization recast feature as well, at which point the loan will re-amortize and in some cases the rate will be re-calculated. Most fixed rate loans which allow deferred interest do not re-calculate the rate upon recast.
After Calculating the Ajustable Rate Payment, many borrowers find that when ARM rates are much lower than FRM rates, shrewd borrowers take an ARM but make the payment that they would have had to make had they taken an FRM. By paying the balance down faster, the cost imposed by rising rates in the future is reduced.
Many Adjustable Rate Mortgages (ARM) are actually "Hybrid" mortgages. They have an initial fixed rate period in the first 2, 3, or 5 years before converting to an ARM. In most cases, prudent homeowners would not allow their mortgages to reach the adjustable period because the fully indexed rates are usually higher than that of the initial fixed rates. Most would refinance out of the adjustable rate mortgages.
Written in the mortgage ARM rider will be information on when the interest rate will change, how frequently it will change and what the maximum increase can be on the first adjustment period. The ARM rider will also tell you what your margin is and index to add to the margin in order to get adjusted interest rate. In the ARM rider there will also be a rate ceiling instead, this is the highest interest rate that your ARM can adjust up to.
The information includes the following information:
- Start Rate
- 1st Adjustment Date
- Adjustment Period
- 1st Adjustment Cap
- Regular Adjustment Cap
- Floor Rate
- Ceiling Rate
This information can be used to calculate your current ARM interest rate.
Refinance Out of An Adjustable With A Fixed - Everywhere you look, economists believe rising interest rates are imminent. According to popular believes, when Adjustable Rate Mortgages (ARM) start to adjust, the new interest rates will be significantly higher, thereby putting unprepared homeowners, who have been accustomed to the low payments of ARMs, at risk of default and eventually foreclosure. If a homeowner with an Adjustable subscribes to this outlook, it is time to refinance out of the ARM and get into a Fixed Rate Mortgage (FRM), while long term rates are still historically low.
Typically, adjustable rate mortgage can adjust from 2-5% on their first adjustment. Check with your mortgage service provider to see how your mortgage will adjust, and when it will adjust.
To really understand you adjustable rate mortgage, you need to know two things, the index and the margin. The index is the adjustable component can be one of several indices. The most common index used is the 6 month LIBOR. Indices move up or down based on numerous economic factors. The margin is the fixed component of the adjustable and does not move. When you adjustable rate mortgage adjusts it's when the index and the libor added together are greater than your current rate.
When you have an adjustable rate mortgage at some point it will adjust. When your loan is a few months away from adjusting, it's a good idea to look into refinancing your loan to a fixed rate. When refinancing to a new loan look into all the options. Going with a 25, 20, or 15 year term might be better option rather than a 30 year if you are able to afford the monthly payment.
If you have an adjustable rate mortgage and you are considering refinancing into a fixed rate to get out of the adjustable you need to consider your short term and long term goals. If you plan on moving from the home within the next few years refinancing into another Adjustable Rate Mortgage (ARM), might be the best option. However, if you have no intention of ever moving then a fixed rate mortgage may be the best option for you. Therefore consider all options before jumping into a new mortgage.
If you want to know the details of how and when your ARM will adjust read through your mortgage Note. The Note is one of the many documents you signed at closing and you should have a copy of. The Note will describe when your rate can adjust, and how the adjustment is calculated, and what the adjustment caps are.
Here in early 2006 financial markets are experiencing a phenomenon known as the inverted yield curve. In a nutshell, that means that interest yields on long term investments like bonds are actually lower than those paid for shorter term ones. What this means for the mortgage market is that long term fixed rate loans are actually priced lower than the ones that have only a short fixed rate period and then convert to an ARM. During periods of inverted yield curves it is a great time for many borrowers to refinance out of their ARM mortgages into long term fixed rate ones.
Along with the security of a fixed interest rate you may also be able to take cash out of your home's equity in the same transaction. It's best to do this at the same time you refinance your adjustable rate mortgage to keep from having to pay closing costs again later. Ask your preferred mortgage professional if your home has grown in value and if a cash-out refinance is right for you.
Many people take adjustable rate mortgages because credit challenges initially prevented them from having a low fixed rate. If you have made all of your mortgage payments on time and your credit score has increased you may be able to refinance into a Fixed Rate Mortgage without increasing your payments.
If you plan to live in your house for the maturity of the loan (30 years) than refinancing out of an ARM to a fixed is a good solution. However, if you plan to move in the next few years another ARM for a fixed period of time will help save money on your monthly payment.
Although the LIBOR index is a common a component in most Adjustable Rate Mortgages, they have lower margins than the other indices. They tend to be more volatile than the other indices. Homeowners that have ARM's that are tied to the LIBOR can see the latest value published in The Wall Street Journal.
If your ARM Adjustable Rate Mortgage is nearing the end of its fixed period, it is easy to make the argument to refinance into a fixed rate. With rates on adjustable rate mortgages rising rapidly, and often dramatically, the payment on a 30 year fixed rate has never looked so good by comparison. Consider how much your ARM payment will be when the rate adjusts (often by 3, 5 or even 6% more than your introductory start or "teaser" rate). If you're like the grand majority of people who took out an adjustable rate mortgage in the past 5 years, your payments may as much as double. That fixed rate doesn't look so expensive now does it? Even if you are in an Option ARM loan and love the minimum payment option, there are fixed rate mortgages available which cater to your needs, offering both Cash Flow minimum payments and fixed rates for 5, 10 or even 30 years fixed.
If you are considering refinancing out of an ARM, it is a good idea to contact a mortgage loan specialist two months before the rate is set to adjust. This will give him enough time to process the application for your new fixed rate mortgage.
In essence, refinancing an adjustable rate mortgage can lower the monthly payments owed on the loan either by changing the loan to a lower interest rate, or by extending the period of loan, so as to spread the re-payment out over a long period of time.
All ARM mortgages have a rate ceiling. This ceiling can be as high as 14%. This means that the interest rate on your mortgage can keep increasing until it hits the ceiling rate. A mortgage with a rate this high would push most home owners into default in a short period of time.