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  • Adjustable-Rate

  • The Adjustable-Rate mortgage (ARM) differs from the Fixed-Rate mortgage in that the interest rate paid on the unpaid principal balance  changes during the lifetime of the mortgage.  There is a starter rate which remains constant for a certain number of years followed by periodic rate changes.  The rate change is based on an index which varies from time to time and a fixed percentage above that called a margin.  The margin limits to how far above the index the rate may change.

    The ARM may be a wise choice for borrowers that choose to pay off their mortgages early or who would not experience financial difficulty if rates rise.  There is always the possibility of refinancing into a Fixed-Rate mortgage should the need arise.

  • Understanding ARMs

    There are at two numbers associated with an ARM.  The first is the number of years the rate remains constant before the first rate change.  The second is the annual frequency of rate changes after the first rate change.  For example, with a 5/1 ARM, the rate remains constant for the first five years.  Then, at the beginning of the sixth year, the first rate change occurs.  Subsequently, every single year after that is another rate change until the mortgage loan is satisfied.

    Some ARMs may not adjust downward should the index decrease.  The Loan Officer (LO) should let you know this.  However, there are limits as to how far the interest rates may rise as well as an overall upper limit the rates may not exceed.  For example, a 5/1 ARM with 5/2/5 caps limits the initial rate change to 5%, subsequent rate changes to 2%, and lifetime change to 5%. Your mortgage loan originator should be able to give these details.

    Nearly all lenders offer ARMs.  They are available for single family homes for loan amounts that exceed conventional loan limits.