What is an ARM loan?
An ARM loan is an Adjustable Rate Mortgage (ARM). The interest rate on an ARM loan is adjusted periodically based on the terms of the mortgage documents. The most common periods are 6 months or 1 year; however, some ARMs, most often with banks, may adjust your rate as often as monthly. The interest rate is typically based on a common index published in newspapers and adjusted by a margin. The margin is in percentage points and rides above the index rate. For instance a loan tied to the T-Bill Index at lets say 6% and a margin of 2% would yield a rate of interest at 8%. ARMs, as opposed to fixed rates, reflect current market conditions. Given the condition of the economy this could be good or bad, and will always be unpredictable.
Prior to the existence of mortgage insurance, individuals couldn’t typically buy a home unless they had at least a 20% down payment. Mortgage insurance benefits the mortgage lender directly by reducing the costs associated with borrower default. It also benefits consumers by lowering down payments, thereby allowing more people to achieve homeownership. FHA insured mortgages require mortgage insurance premiums (MIP) and conventional loans with a loan-to-value greater than 80% (and in some cases even lower percentages) require private mortgage insurance (PMI).
An ARM loan is an Adjustable Rate Mortgage. The interest rate on an ARM loan is adjusted periodically based on the terms of the mortgage documents. The interest rate is typically based on a common index published periodically, adjusted by a margin. The margin is an amount charged in addition to the index and typically does not change over the life of the loan.
ARM stands for Adjustable Rate Mortgage. With an ARM loan, the interest rate and the monthly principal and interest payment change (adjust) periodically. The timing, frequency, and methodology of the adjustments are outlined in the loan documents. ARM loans may have fixed rates for as long as 10 years.
