At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
What is an ARM Mortgage?
An adjustable rate mortgage (ARM mortgage) is a mortgage whose interest rate is linked to an economic index. The interest rates and your payments will be adjusted periodically as the index fluctuates. The index is a rule used by lenders to measure the changes in interest rates. A common index used by lenders measures the activity of one, three and five year Treasury securities.
When applying for an ARM mortgage, you also need to consider the lender's margin. This is in effect the lender’s markup; it is the lender’s cost of doing business and the profit they intend to make on the loan. There is also the adjustment period to consider. This is the period between interest rate adjustments. An ARM mortgage with annual adjustments means that interest rates can change annually.
Interest rates for an ARM mortgage are lower than those of a fixed mortgage. Fixed rate mortgages have interest rates that remain the same over the life of the loan. A lower rate of interest means lower repayments; this is beneficial if you wish to apply for a larger loan. If you plan to sell your house quite quickly, then the interest rates may not be such a consideration for you. If you expect your income to increase, it may cover the cost of interest rate fluctuations.
All of these aspects should be taken into consideration if you are thinking of taking out an ARM mortgage. An ARM mortgage can be converted into a fixed rate mortgage in the future, but the cost of doing this may see your savings spent on the conversion fees, which may equal the initial savings you made when taking out your ARM mortgage in the first place.
There are interest rate caps that can be applied to an ARM mortgage. An overall cap will limit how much the interest rate can increase over the life of the loan. Overall caps entered the law in 1987. Periodic caps are a way of limiting the amount your interest can increase from one period of adjustment to the next. You can also have a payment cap that limits the amount your monthly payment can increase at each adjustment.
A word on negative amortization, which occurs when your payments do not cover the cost of the interest. The unpaid amount will be added back to your loan and even more interest will be generated on the debt. If this is allowed to continue, then you could end up making many payments and still owe more than you did at the beginning of your loan. As with all mortgages, get the best advice you can from banks and lenders, and remember to get various quotes before signing.
AS FEATURED ON:
AS FEATURED ON:
-
![ARM mortgage payments are linked to an economic index.]()
By: Vesna CvorovicARM mortgage payments are linked to an economic index. -
![Homebuyers should evaluate several factors before negotiating an adjustable rate mortgage (ARM).]()
By: bmakHomebuyers should evaluate several factors before negotiating an adjustable rate mortgage (ARM).
Discussion Comments
Sneakers41-These types of option arm mortgages or jumbo arm mortgages are best for investors who have the savings and can easily rent out the property until the market turns again.
Zillow offers information on arm mortgage loans and even provides the mortgage payments along with any additional fees from the corresponding lenders. Bankrate offers an arm mortgage calculator and tells you the best national rates.
You can also do an arm mortgage refinance but the costs to convert to a traditional fixed rate loan are high.
Bhutan-A Libor arm mortgage is tied to the Libor index which is the index in which banks loan money to each other.
Watching the libor index can help you stay on top of an arm home mortgage. The rates right now are so low that it might be better to go with a traditional mortgage especially if you plan on staying in the home a while.
Many people got caught up with arm home mortgage loans because they expected to flip the homes and get rid of the home quickly. When this did not happen, many people went into foreclosure because they could not pay the higher mortgage payments.
Cafe41- A 3 year arm mortgage and a 5 year arm mortgage offer a fixed interest rate for the first three year and five year respectively. After that point, the interest rates adjust annually. This can be a good mortgage for someone that is looking to stay in the home for a few years because the initial mortgage payments are considerably lower.
If you plan on staying long term in the home a traditional mortgage might be a better option than an arm home mortgage.
Milagros- I agree. An arm fixed mortgage is like a hybrid loan in which the borrower will have a portion of the loan with a fixed rate and the remaining period becomes a variable rate loan.
This type of loan is best for someone that may need to have a fixed amount for their mortgage payments initially and anticipates either refinancing the loan in the future or taking their chances on the interest rates remaining low.
An ARM mortgage has in most cases lower introductory rate as compared to a mortgage with fixed rate. In some instances this may work fine, however, a fixed rate mortgage offers the security that an ARM mortgage does not.
With a fixed mortgage you know what your payments are, and what they are going to be until the loan is paid off.
Post your comments