Adjustable Rate Mortgages
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consultation with our home loan experts.
These loans generally begin with an
interest rate that is 2-3 percent below a comparable fixed rate
mortgage, and could allow you to buy a more expensive home.
However, the interest rate changes at specified intervals (for example,
every year) depending on changing market conditions; if interest rates
go up, your monthly mortgage payment will go up, too. However, if rates
go down, your mortgage payment will drop also.
There are also mortgages that combine aspects of fixed and adjustable
rate mortgages - starting at a low fixed-rate for seven to ten years,
for example, then adjusting to market conditions. Ask our mortgage
professionals about these and other special kinds of mortgages that fit
your specific financial situation.
Standard ARM Programs
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consultation with our home loan experts.
A few options are available to fit your
individual needs and your risk tolerance with the various market
instruments.
ARMs with different indexes are available for both purchases and
refinances. Choosing an ARM with an index that reacts quickly lets you
take full advantage of falling interest rates. An index that lags behind
the market lets you take advantage of lower rates after market rates
have started to adjust upward.
The interest rate and monthly payment can change based on adjustments to
the index rate.
6-Month Certificate of Deposit (CD) ARM
Has a maximum interest rate adjustment of 1% every six months. The
6-month Certificate of Deposit (CD) index is generally considered to
react quickly to changes in the market.
1-Year Treasury Spot ARM
Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year
Treasury Spot index generally reacts more slowly than the CD index, but
more quickly than the Treasury Average index.
6-Month Treasury Average ARM
Has a maximum interest rate adjustment of 1% every six months. The
Treasury Average index generally reacts more slowly in fluctuating
markets so adjustments in the ARM interest rate will lag behind some
other market indicators.
12-Month Treasury Average ARM
Has a maximum interest rate adjustment of 2% every 12 months. The
treasury Average index generally reacts more slowly in fluctuating
markets so adjustments in the ARM interest rate will lag behind some
other market indicators.
Introductory Rate ARMs
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consultation with our home loan experts.
Most adjustable rate loans (ARMs) have a
low introductory rate or start rate, some times as much as 5.0% below
the current market rate of a fixed loan. This start rate is usually good
from 1 month to as long as 10 years. As a rule the lower the start rate
the shorter the time before the loan makes its first adjustment.
Index - The index of an ARM is the financial instrument that the
loan is "tied" to, or adjusted to. The most common indices, or, indexes
are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate),
Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of
Funds (COFI). Each of these indices move up or down based on conditions
of the financial markets.
Margin - The margin is one of the most important aspects of ARMs
because it is added to the index to determine the interest rate that you
pay. The margin added to the index is known as the fully indexed rate.
As an example if the current index value is 5.50% and your loan has a
margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range
from 1.75% to 3.5% depending on the index and the amount financed in
relation to the property value.
Interim Caps - All adjustable rate loans carry interim caps. Many
ARMs have interest rate caps of six-months or a year. There are loans
that have interest rate caps of three years. Interest rate caps are
beneficial in rising interest rate markets, but can also keep your
interest rate higher than the fully indexed rate if rates are falling
rapidly.
Payment Caps - Some loans have payment caps instead of interest
rate caps. These loans reduce payment shock in a rising interest rate
market, but can also lead to deferred interest or "negative
amortization". These loans generally cap your annual payment increases
to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs have a maximum interest rate or
lifetime interest rate cap. The lifetime cap varies from company to
company and loan to loan. Loans with low lifetime caps usually have
higher margins, and the reverse is also true. Those loans that carry low
margins often have higher lifetime caps.
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