What is an adjustable rate mortgage (A.R.M.)?
This is a loan in which the interest rate is adjusted periodically usually based upon an index to keep your interest rate near current market rates. The amounts and times of adjustment are agreed upon in the loan documents executed at closing. Rates are tied to an index specified in the original loan documents. The principal and interest payment amount is adjusted according to the rate adjustment or preset amounts in your loan documents.
A type of mortgage instrument in which the interest rate adjusts periodically according to a predetermined index and margin. The adjustment results in the mortgage payment either increasing or decreasing. A 1-year ARM, for example, will have an initial interest rate for 1 year and then adjust on the second year, and continue to adjust annually over the life of the loan. With an ARM loan, you typically get a lower starting rate in exchange for taking a risk that rates may rise in the future. There is also a cap on how much the interest rate can go up or down.
An A.R.M. is a mortgage loan that is fixed for a period of time, typically 3-7 years, and then adjusts each year thereafter. For instance, a 5/1 A.R.M. is fixed for 5 years, and then adjusts each year after the 5 year period. The benefit of an A.R.M. is that you typically will get a lower initial rate than on a fixed rate product such as a 30 or 15 year loan. However, you must consider that you will have a loan whose payment and interest rate can change..
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 fluctuates. You’ll hear the following terminology when talking with lenders about ARMs. Index An index is what the lender uses to measure interest rate changes. Common indexes used by lenders include one, three, and five-year Treasury securities, but there are many others. Each ARM is linked to a specific index. Margin Think of the margin as the lender’s markup. It is an interest rate that represents their cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine your total interest rate. It usually stays the same during the life of the loan. Adjustment period The adjustment period is the period between rate adjustments. You may see an ARM described with figures such as 1-1, 3-1, and 5-1. The first figure in each set refers to the initial period of the loan, dur
