Adjustable Rate Mortgages

Adjustable rate mortgages, also known as variable mortgages or ARM's, are mortgage programs where the interest rate fluctuates during the course of the loan. The amount of times a rate changes in a given time period depends upon pre-set conditions of the loan type, and the fluctuation amount depends on which index it is tied to. Some popular indexes associated with ARM's include the T-Sec (Treasury Security Index), the COFI (Cost of Funds Index), and the LIBOR (London Inter Bank Offering Rate).

Margins and caps: with most adjustable programs, the interest rate is calculated by combining the index with a set percentage the lender tacks on, called a 'margin.' The margin, usually 2-3%, is steady throughout the loan term, though the interest rate will rise and fall. The better ARM's have very distinctive stipulations about how fast and high interest rates can rise, to protect the borrower from fast-rising rates. For instance, an ARM might have a periodic cap of two percent, and a lifetime cap of five percent. This means that the interest rate cannot increase over 2% at any given time, and over the entire life of the loan cannot rise over 5%, thereby affording the homeowner some protection.

Nowadays, customers benefit from plans that combine aspects of both FRM's and ARM's, in order to exactly fit the financial situation of each person. Contact your mortgage loan professional to find out more information on hybrid mortgage loan programs. Or visit our pages on Balloon Mortgages or Fixed Rate Programs.

Types of hybrid ARM's:

• Two-step mortgages: for an introductory period of 5-7 years, these ARM's have a fixed rate and then afterwards change to an variable rate. The advantage of these types of programs is that the homeowner will likely be able to borrow a greater amount because the initial payments will be less.

• Convertible ARM's: these are programs that enable the homeowner to convert to an FRM if they so choose, if rates jump or fall. By converting to a FRM, you can lock in a rate before the rates skyrocket, however, the rates may fall again and the homeowner would then be saddled with a rate higher than the current base rate. Conversely, if rates were to fall below their original fixed rate, then the homeowner could choose to convert to lock in the lower rate. These hybrid programs are great options, but also generally have higher points and rates.

The true cost of loan is oftentimes difficult to calculate, but our calculator below should help give you a general estimate.