Adjustable Rate Mortgages (ARM’s)

December 19, 2008
Matt Isleib

 

There have been numerous ARM programs that have been offered by lenders.  And as we muddle through the current mortgage mess we are back to basically a handful of different options and  not the numerous amount that once were available.

 Some people are often very uncomfortable with the thought of choosing an ARM product for their mortgage. But sometimes it makes sense for that borrower. An example would be if you plan on living somewhere temporarily. Maybe due to your job you are often re located. A short term arm may allow you a lower interest rate while you own your home. Another example is if the home is an investment that you will fixing up and selling. Again a shorter term mortgage would be a good possibility for that person.

ARM’s are exactly what they sound like, adjustable rate mortgages. The most common are a 3,5 or 7 year ARM. What that means is for example a 3 year arm is a mortgage where the rate is fixed for the first three years and then it becomes adjustable. A 5 year ARM is fixed for the first five years and then becomes adjustable, and so on and so forth.  The ARM’s are tied to an index, typically the LIBOR index (London interbank offering rate) . The ARM’s also have what is called a margin, typically of 2 and in the adjustment period usually adjust once a year. Some programs are twice a year. Like I said there a handful of different options.  For example if the “index” (LIBOR)  is currently 3.00% and you have a 2.00% margin over the index your interest rate would adjust to 5.00%.  Depending on what your starting interest rate is there are “caps” or a maximum amount the interest rate can increase when it comes time for adjustment.  Typically the caps are 2% per adjustment and 5% for the life of the loan.  So, if you started with a 4.00% interest rate no matter how high the rates go…the first interest rate adjustment could not go higher than 6.00% and over the life of the loan your rate could never be higher than 9.00%.    It makes sense to always pay close attention to all of the terms of your loan and don’t sign anything until you are comfortable that you understand how your interest rate can adjust.

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Call us today for Connecticut’s lowest arm rates 203-838-6760