Adjustable Rate Mortgage (ARM)
Adjustable Rate mortgage (ARM), also called as variable-rate mortgage, is a mortgage loan where payments will fluctuate (based on market factors) after a fixed period of time. The initial interest rate will be lower than that of a fixed rate mortgage; however, changes in the market can result in an increased interest rate, which will ultimately effect the borrower's monthly payment.
For borrowers whose income may go up, an adjustable rate mortgage might be the best option because of early lower payments.
For example, a 3/1 ARM loan offers a fixed-rate for the first three years, adjusting once a year thereafter. A 5/1 ARM loan offers a fixed-rate for the first five years, adjusting yearly thereafter.
In an ARM, the interest rate on the note periodically adjusts based on an index which reflects the cost to the lender.
Some of the most common indexes are:
- The 11th District Cost of Funds Index
- The Treasury Bill Index
- London Interbank Offered Rate (LIBOR) based indexes
- Constant Maturity Treasury (CMT)
For the borrower, adjustable rate mortgages may be less expensive, but at the price of bearing higher risk. Many ARMs have "teaser periods", which are relatively short initial fixed-rate periods (typically one month to one year) when the ARM bears an interest rate that is substantially below the "fully indexed" rate. The teaser period may induce some borrowers to view an ARM as more of a bargain than it really represents. A low teaser rate predisposes an ARM to sustain above-average payment increases.
Ask our Loan Originator about these and other special kinds of mortgages that fit your specific financial situation.