What is an ARM – Adjustable Rate Mortgage?
An adjustable rate has an interest rate that varies over the initial predefined term of the loan. Different programs feature different terms (in years) of the variation period – normally from 1-7 years with 3 and 5 year ARM’s being the most common. An Arm typically will begin at an interest rate that is lower than interest rates available for fixed rate mortgages of equal term. Each adjustment period (normally every 6 or 12 months) the interest rate is adjusted based on an index plus a margin. The index is normally a widely published financial indicator such as the LIBOR which fluctuates up and down with the financial markets. The margin is typically 2-3%, therefore if at the time of adjustment the LIBOR was at 3% and the programs margin was 2% the prevailing mortgage interest rate would be 5%. ARM’s also have caps which limit the maximum amount the loan may vary during each adjustment period and the maximum it may adjust over the life of the loan, e.g. CAPS of 2 & 6 means that the int
