The ARM

"What is an ARM?"

ARM stands for Adjustable Rate Mortgage. It is different from a standard mortgage in that the interest rate for the term of the contract may vary from time to time at pre-arranged intervals. This is different from a standard mortgage where the interest rate is constant over the entire life of the contract.

With an ARM your interest rate may very well go up. With that in mind, you may ask "why would I want it if my rate and payment can go up?" The simple reason is it gives you an opportunity to buy much more house for the money in the short term. With an ARM you qualify with more buying power.

Many people favor an ARM because people typically move in 5-7 years. Job change, growing family, higher income influence these moves. Buyers with an ARM are also thinking that the rate of appreciation on the home will put them ahead in 5 years or less. In a vibrant market this can very well be true.

How is the interest rate on an ARM determined? Each ARM is tied to an economic index. As the index changes, so will your interst rate, either up or down according to the index. It is a guide used by lenders to measure interest rate changes. Many are based on the activity of one, three and five year U.S. treasury securities. There are many other indexes used but your ARM will be tied to a specific one. Each change will come after the adjustment period specified in your loan contract. ARM's will be described as 1-1, 3-1 and 5-1 typically. The first number in each description refers to the term of the initial period of the loan, during which the interest rate will remain constant according to the inital rate. The second number is the adjustment period, indicating how long till the next adjustment period. With a 1 as the second number, your payments could change in as little as one year.Each lender does use a different index, so if shopping for an ARM, you need to ask questions.

You want to find a loan tied to an index that has remained stable in it's history to avoid bad surprises. You should also find out the margin rate the lender charges. Margin rate is the profit line the lender adds to the index interest rate to determine the lender's profit. Lenders are required to give you written information that will help you compare different loans you are seeking but even with all this at your fingertips, it can still be very confusing. Many more things must be considered, including negative amortization, buydowns, interest rate caps and so on.

We are here to help you. We can conference with you and help provide more information and understanding to help you in the biggest investment in your lifetime....your home.

For us...it's personal...every time!

Thanks,

Esta and John Ingle Realtors®