Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages are loans where the interest rate can vary throughout the loan’s term. Typical ARMs are fixed for a short period of time then adjust according to market conditions. Examples of typical ARMs are 3/1, 5/1, 7/1, and 10/1 meaning the rate would be fixed for 3, 5, 7, 10 years then adjust. Usually these types of loans are amortized over 30 years. All ARMs have a margin and an index. Margins vary as well, typically from 1.75% to 3.5% depending on the index and loan to value (amount financed / value of property). The index is what the ARM itself is tied to. For example, ARMs can be based off of London Interbank Offered Rate (LIBOR), 1 year Treasury Security, Prime, or the 11th District Cost of Funds (COFI).

At the end of the fixed portion of the loan is reached, the margin and index are added and the new rate is reached. That rate will be your new loan rate until the next adjustment period. Every year this will happen, however there are usually parameters limiting adjustments called Caps. Here is an example of a typical ARM. 5/1 ARM with an initial interest rate of 5.5%, an initial rate cap of 2%, a lifetime cap of 6%. What this means is, in the sixth year of your loan your interest rate could be 7.5% and the highest it would ever be is 11.5%.

Most people ask us they could benefit from an ARM. There are multiple answers to this but the most common reason for a consumer to borrower on an ARM is to purchase a more expensive home. ARM’s offer the lowest starting rates of any loan programs which results in the lowest payments. This is also a popular program for anyone that incurs frequent job transfers. If you know you won’t own the home for more than 3 to 10 years, why pay at a higher rate than you need to? Let your Sr. Loan Officer with Infinity Financial Group know what your entire situation will be so we can serve you better.