Adjustable Rate Mortgages...

An adjustable rate mortgage (ARM) has an interest rate that may change during the term of the loan.  Because of that, your monthly payments of principal and interest may vary.

How does an ARM work?

ARM interest rates may vary in response to a change in an index to bring the interest rate on the mortgage in line with market rates.  Some indices on which ARMs are based are the Treasury bill rate, prime rate, London Inter-bank Offered Rate (LIBOR) or Cost of Funds Index (COFI).

When the interest rate begins to adjust, the index is added to a pre-determined margin.  This combination results in a new interest rate.  A mortgage holder is protected by a maximum interest rate, called a “ceiling,” which usually is fixed for the life of the loan (although some ceilings are reset annually.).

What types of ARMS exist?

The Mortgage SuperCenter offers a broad range of ARM programs.  These range from an ARM with an initial interest rate that adjusts monthly beginning in the first month of the loan term to one that may be fixed for as long as ten years before it begins adjusting to market rates (a 10/1 ARM). 

Other popular ARMs include the 1/1, 3/1, 5/1 and 7/1 ARM.  In each case, the first number means that the initial interest rate is fixed for a period of 1, 3, 5 or 7 years, respectively, and then the rate adjusts every year for the remaining term of the loan.

Interest-only ARMs have gained in popularity.  A mortgage is “interest only” if the monthly mortgage payment does not include any repayment of principal for some period of time.  The monthly payment consists only of the interest on the remaining principal balance of the loan.

The Mortgage SuperCenter offers both conventional ARMs (for loans under $333,700 for single-family homes) and jumbo ARMs (for loans over $333,700 for single-family homes).

Why choose an ARM over a fixed rate mortgage?

ARMs are attractive for several reasons.  First, you may desire an ARM because it generally offers a lower initial interest rate than a fixed rate loan.  The initial rate may rise or may fall, depending on the underlying index.

Second, an ARM provides greater cash flow during the initial term of the loan.  Thus, you have greater financial flexibility, allowing you to invest, pay home expenses, pay off debt or for other financial needs.  An ARM may allow you to be able to buy a more expensive home that you otherwise could not afford, particularly if you expect your income to rise in the future.

A third reason to choose an ARM is if you do not plan to stay in your home for longer than the initial fixed rate term of the ARM.  Choosing an ARM means you will pay less interest on your loan during that time.

Finally, ARMs are popular during periods of low inflation because the indices on which they are based often reflect inflationary expectations.

When you want a home loan, whether it’s an ARM or otherwise, The Mortgage SuperCenter will be there to help you find the right loan to make your dreams come true!

Call us at (203) 465-7976 or contact us on-line to begin the loan process today!