An Introduction to ARM Mortgages

May 26, 2010
2 min. read time

Introduction to: Adjustable Rate Mortgages

At some point you will want to purchase a home and at that point you will need to apply for a mortgage loan. However, purchasing a home may become complicated if you aren’t aware of the various mortgage terms. One key term we’re going to define today is an ARM loan.

An ARM is a mortgage loan that doesn’t have a fixed interest rate for the entire life of the loan. There are different periods in this kind of mortgage loan. The Initial fixed rate period, and the adjustable rate period. During the initial fixed period, no changes in the rate will take place. This can last from six months to ten years depending on the type of ARM that you choose. The changes in the interest rate will start during the adjustable period. The rate can either increase or decrease.

There are 2 factors that will make the rate change. These are the indices and the margin. There are several types of indices that contribute to the rate but the commonly used index by various lenders are the Constant Maturity Treasury and London Interbank Offered Rate. The margin also influences the rate, as this is the percentage that can be added to the index. There is also a ceiling and floor. This contributes to the maximum limit that the rate can increase or decrease at each recalculation date.

What you need to know about ARM loans

A great reason one would choose to go with an ARM would be the potential to save during the fixed rate period, During that period, the interest rates and monthly payments are lower than a conventional 30 year fixed rate loan. Remember, that will change and most likely increase, when the adjustable rate period starts.

Another important fact to know about an ARM is how often the rate can change after the initial fixed period lapses. The most common choice is an annual recalculation but there are many other types.

An ARM is not for everyone! Make sure you that you choose this type of mortgage with confidence that you understand all of the terms of this type of loan before you commit to it.

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