Key Features about Adjustable Rate Mortgage Loans
Overview of an Adjustable Rate Mortgage (ARM)
What is an adjustable rate mortgage? This type of mortgage has a “floating” interest rate that changes according to specific criteria. The initial interest rates on adjustable rate mortgages are usually fixed for a specific period of time. After the “introductory” period the rate is adjusted periodically—quite often this is on a monthly basis. The borrower will pay an interest rate based on a benchmark (usually the prime rate) plus an additional amount. This is called an ARM margin.
Adjustable rate mortgage loans are also called variable rate or floating rate mortgages.
The Best Candidates for ARMs
Not everyone is a good candidate for an adjustable interest rate mortgage. ARMs are best suited for those in the following situations:
- Are fully aware their interest rate may increase after the initial period
- Have no plans to hold onto the property for the full term of the mortgage
- Expect regular increases in their income over the next few years
- Want a lower initial interest rate and mortgage payment
Features of an Adjustable Rate Mortgage
There are several good reasons a person might want to apply for a bad credit mortgage refinance.
- The interest rate and monthly payment remain consistent for a specific period of time—usually 3, 5, 7 or 10 years—and then is adjusted (usually annually)
- Loans may be available for longer terms depending on the lender
- Includes an interest cap that defines how high adjustable mortgage rates can go
- Individual lenders may be able to add additional features
- Withdraw from your participation in an adjustable rate mortgage if interest rates have increased
- Lowering the monthly mortgage payment
- Refinance to consolidate debt and thus spend less on other debt
Real-Estate-Yogi.com Defines Adjustable Rate Mortgage Loans
All potential borrowers need to study the details of an ARM before they make a final decision. It’s important to review all of the information that may have a potential impact on your interest rate and payments. Some of the information you need to consider include the following:
- Initial rates
- Adjustment intervals
- Rate and payment caps
The initial rates you pay on adjustable rate mortgages are usually lower than the current interest rate. This can help a borrower qualify for a home they may not ordinarily be able to obtain a mortgage to buy.
When you have reached the end of your initial rate term, the interest rate will be recalculated based on specific criteria for your loan. There will probably also be a margin added to this figure to provide the actual interest rate you will be paying.
They periods of time between interest rate adjustment will vary from lender to lender. If your interval is one year, this means you will pay the same interest for one year before the lender makes any adjustments.
It’s important to be aware of rate caps. Rate caps restrict the lender from raising the interest rate above a certain percentage at each adjustment interval.
Advantages Of Choosing Adjustable Rate Mortgages
- One benefit a buyer can derive by using an adjustable rate home mortgage is the closing costs are often less expensive than those you ordinarily pay with a fixed rate mortgage.
- If you choose an ARM that includes a fix rate period, the fixed rate during that period is usually lower than the normal rate on a permanently fixed interest rate mortgage.
- The majority of people don’t keep the same mortgage for more than five years, a 5/1 ARM may provide enough time for you to sell or refinance your home without ever facing an adjustment on your original interest rate.
- The initial payments on an adjustable rate home loan are usually lower than on a fixed rate mortgage. This helps those who are first-time homebuyers but expect their income to increase over the next several years.
Understanding an Adjustable Rate Mortgage
How do adjustable rate mortgages work? The following points will help you gain some understanding about how adjustable rate mortgages work.
- It is possible to find both a VA and FHA adjustable rate mortgages for those who want the flexible guidelines and security of a government-insured mortgage.
- Interest rates are usually fixed for five or seven years (this may vary with the lender). Current adjustable mortgage rates will vary based on market conditions.
- There is a cap on the interest rate as well as a maximum percentage your interest can rise during each adjustment period.
- Your actual mortgage payment will be contingent upon your situation and the current interest rates in effect when you apply for your mortgage.
- There is no pre-payment penalty on your mortgage.