Adjustable Rate Mortgage
An adjustable rate mortgage is also called an ARM for short. It is a mortgage with an interest rate that connected to an economic index. What it means is that the interest rate and your payments are periodically adjusted up or down depending upon the index changes. The index is a guide that lenders use to calculate interest rate changes. There are some common indexes used by lenders. They are the activity of one, three, and five-year Treasury securities. Each adjustable rate mortgage is linked to a specific index.
Lenders also use margin in an index to determine your total interest rate. The margin is the lender’s markup. It is an interest rate that signifies the lender’s cost of doing business plus the profit they will most likely make on a loan. The margin usually stays the same during the life of your mortgage loan.
Adjustable rate mortgage is subject to the adjustment period. This is the period between potential interest rate adjustments. An adjustable rate mortgage is described with figures such as 1-1,3-1, and 5-1. The first figure in each set is the initial period of the loan. During this initial period of your loan, the interest rate will stay the same, as it was on the day you signed your loan paper. The second number refers to the adjustment period. It shows how often adjustments can be made to the interest rate after the initial period is over. The earlier examples show the adjustable rate mortgages that have annual adjustments. This means that adjustments could happen every year.
This type of mortgage is perfect for those inidivduals having sporadic or indeterminant amount of income every month.
It is a good idea that even if your payments can go up, you should still consider an adjustable rate mortgage. The initial interest rate for an adjustable rate mortgage is lower than that of a fixed rate mortgage. The lower rate will lower your payments and can help you qualify for a larger loan. If you plan to sell the house within a few years, the possibility of rate increases is not a huge factor.
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