What is an Adjustable Rate Mortgage?
In this video, mortgage advisor, Jeff Thomas describes how to purchase your first home and the process you must go through to obtain a mortgage. This video is designed for first time homebuyers and also provides valuable information to indivduals who have purchased a home in the past. This video includes an overview of the four parts of a loan file, mortgage jargon, the loan process, house hunting, the types of mortgages available and the 7 steps on how to manage your mortgage correctly.
Adjustable Rate Mortgages (ARM) Variable, or an adjustable loan, is loan whose interest rate, and accordingly monthly payments, fluctuates over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.
An adjustable rate mortgage, also known as ARM or floating rate mortgage, is a type of mortgage with a flexible interest rate. This means the percentage rate fluctuates based on an index, and it is adjusted to always benefit the lender, not matter how the market changes. There are basically five types of indexes used to calculate the interest rate on adjustable rate mortgage. These are: the Constant Maturity Treasury (CMT), the 11th District Cost of Funds Index (COFI), the 12-month Treasury Average Index (MTA), the National Average Contract Mortgage Rate, and the London Interbank Offered Rate (LIBOR). An adjustable rate mortgage is a common solution for financial institutions that cannot afford the risk of fixed loans, such as banks funded by customer deposits only, or for loan companies offering a loan to people without a credit history, or those requesting a rather large loan. An adjustable rate mortgage is not necessarily a bad arrangement for the borrower, just a more risky one. In
In mortgage terms, an ARM can’t throw a baseball, but it may help you buy a home with a lower payment. An ARM is an Adjustable Rate Mortgage, meaning the interest rate adjusts on a regular schedule to correspond to current rates, usually once or twice a year. The interest rate and payments rise and fall with the index, such as the Treasury Bill rate, Prime rate or LIBOR. You agree to the amounts and times of adjustment when you set up the loan. Also, ARMs come with an interest rate cap that limits the total amount your rate can change over the life of the loan.
