Adjustable Rate Mortgage.

When a loan has an interest rate that varies based on one or more indexes, it is referred to as an adjustable rate mortgage (ARM). Many of these loans are laid out as

“hybrid” loans,

which means the interest rate is fixed for a given period of time, after which the interest rate fluctuates based on indexes that are determined at the time the loan is written. For instance, a 5/25 ARM loan would indicate the borrower pay a fixed rate for the first five (5) years, after which the loan converts to an adjustable rate mortgage for the remaining 25 years. When the loan enters this variable rate stage, a margin is added to whatever

interest rate

the predetermined index is at, and applied to the principle balance of the loan.

Adjustable Rate Mortgage 10/1

10/1 ARM - the rate is

fixed for a period of 10 years

after which in the 11th year the loan becomes an adjustable rate mortgage (ARM). The adjustable rate is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 11th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).

Sometimes called a 10 and 1.

 

APPLY

Adjustable Rate Mortgage 7/1

A 7/1 ARM is an adjustable-rate mortgage that carries

a fixed interest rate for the first seven years of its term,

along with fixed principal and interest payments. After that initial period of the loan, the interest rate will change depending on several factors. >A 7/1 ARM might be attractive to borrowers over a fixed-rate mortgage because they’ll pay lower interest in the initial period. If you are trying to decide which type of adjustable rate mortgage to get, consider a 7/1 ARM. This type of ARM product will give you seven years

until your first adjustment period,

which means you have a fixed rate for seven years. If you are considering selling your home in that seven-year period, it can make sense to choose a 7/1 ARM because the interest rate is lower than fixed rates are. 

APPLY

Adjustable Rate Mortgage 5/1

The 5-1 hybrid ARM is the most popular type of ARM,

but it is not the only option. There are also 3/1, 7/1 and 10/1 ARMs. Respectively, these loans offer an introductory fixed rate for three, seven or ten years, after which they adjust annually. In rare cases, there are also 5/5 and 5/6 ARMS, which both feature a five-year introductory period, followed by a rate adjustment every five years or every six months. There are also 15/15 ARMs that adjust once after 15 years. You can explore the various types of adjustable-rate mortgages available from your local lenders by using a tool like a mortgage calculator. How Do 5-1 Hybrid ARMS Adjust? When ARMs adjust, their interest rates change based on their marginal rates and the indexes to which they are tied. For example, if a 5-1 hybrid ARM has a 3% margin and the index is 3%, it adjusts to 6%. However, the extent to which the fully indexed interest rate on a 5-1 hybrid ARM can adjust is often limited by an interest rate cap structure.

There are several different indexes

to which the fully indexed interest rate may be tied, and while this number varies, the margin is fixed for the life of the loan.Advantages of a 5-1 Hybrid ARM 

APPLY

Adjustable Rate Mortgage 3/1

A 3/1 ARM (adjustable-rate mortgage) is a type of mortgage that is very commonly offered today. If you are considering this type of mortgage, you will want to make sure that you understand exactly what is involved with it.

Here are the basics of the 3/1 ARM.

Fixed Interest Period With this type of mortgage, you will have three years of fixed interest. During this period, you will have a fixed mortgage payment every month.During this time, you will not have to worry about what interest rates are doing in the market because it will not affect your monthly payment. Adjustable Rate. After the initial three-year period is up, the loan will convert to an adjustable-rate mortgage. At that time, your interest rate will be

recalculated at the beginning of the year.

This will provide you with a new monthly payment for that particular year. For a certain number of years, your monthly payment will be recalculated at the beginning of the year. 

APPLY

What are Indexes and Margins

After the designated fixed rate period of a loan,

an ARM loan’s interest rate will increase or decrease

based on an index, plus a predetermined margin. Typically, mortgages are tied to one of three indexes: The London Interbank Offered Rate (LIBOR), the maturity yield on one-year Treasury Bills, or the 11th District cost of funds index (COFI). As the rates of whichever index fluctuates, so does the interest due on the loan. However, the margin is fixed, and simply added to whatever the index is at;

this sum determines

the interest rate applied to the loan.

Payment Caps

In a measure to control uncertainty,

ARM loans come with rate caps

that place a limit on how high a consumer’s interest rate can get. Additionally, there are provision in place to control how much both interest rates and payments within different periods can increase. Periodic rate caps limit how much interest rates may increase anywhere from year-to-year, to over the duration of the loan. Payment caps on the other hand lay out (in dollar amounts rather than percentage points) the amount

monthly payments can incense on a mortgage.