What is an adjustable rate mortgage (A.R.M.)?
An ARM is a mortgage that has a fixed interest rate for a period of time and then adjusts periodically in relation to an index. The rates for an ARM are typically lower than a 30-year fixed mortgage. What is the term “amortization”? Amortization is a method where the loan amount is repaid gradually though regular monthly payments of principal and interest. During the first years of the loan, the majority of the payment is applied toward the interest owed. During the final years, most of the payment is applied to the remaining principal balance. What is the Down Payment? The down payment is the amount of the cash available to purchase a home. Some loan programs require the down payment to be from the buyer’s own funds and some allow for the down payment to be a gift.
An ARM has an interest rate, which changes periodically based on a market index and margin. The loan payment will vary accordingly based on the rate change schedule. With a fixed rate mortgage, the rate will stay the same over the entire loan term. Each ARM loan program will have an associated disclosure you may ask for to determine the applicable terms of the ARM. An ARM loan may offer a lower initial interest rate with a lower initial monthly payment, which could help you qualify for a larger loan amount. However, the interest rate is subject to change in the future and your monthly payment could increase at each adjustment period. The lender may look at the possible rate changes when determining your affordability of the loan. Adjustment Period: The ARM will have an initial period before the first rate change and will then adjust periodically on a set schedule thereafter for the loan term. EXAMPLE: 5/1 ARM – the initial period before the first rate change will be 5 years and will th
