An adjustable-rate mortgage is also called an ARM; it is a popular type of mortgage with an introductory interest rate that will last for a specific period of time before resetting, or adjusting, at intervals for the remainder of the loan. Adjustable-rate loans are popular because they typically have a lower interest rate than a fixed loan, although your mortgage payment will change when the interest rate resets. All adjustable rate mortgages have maximum adjustments (caps) for the interest rate which is used to calculate the payment.
Depending on the ARM, the initial interest rate may be fixed for as little as 60 months or 10 years or longer. Many borrowers who find the ARMS match well with their future homeownership plans, opt for the 5-year or 7-year ARM. These hybrids, fix the interest rate for the first months of the loan; 60 mos. or 84 mos. respectively, and thereafter the interest is subject to reset annually for the remaining term. The fixed period followed by annual adjustments are known as 5/1, 7/1 or 10/1 ARMS. The fixed periods may be a means of planning, such as comparing to the future timeframe that you plan to be in this home.
The Consumer Handbook for Adjustable Rate Mortgages and a program disclosure are available to you when inquiring about an ARM, these provide information which will help you discuss with your MIG Mortgage Professional whether this is the right loan type for your next home financing needs.
There are several advantages to an adjustable-rate loan:
You can learn how much your ARM interest rate will rise or fall based on the margin or index it is tied to. The most common type of index is the LIBOR (London Interbank Offered Rate) published in the Wall Street Journal. Other indices are T-Bill (United States Treasury Bill) or CMT (Constant Maturity Treasury). Added to the index is a margin, which is an amount that remains the same throughout the term of your loan. Index plus margin rate equals the rounded reset interest rate for your next period of time. You can negotiate the margin rate with us when you apply for the mortgage.
As an example, if your index rate is 4 percent and your margin is 1.5 percent, the fully indexed rate of your loan will be 5.5 percent.
You can get some protection against significant increases in your monthly mortgage payment with a cap limit. This will be the maximum amount your mortgage rate and payment can change. There are a few types of caps common in adjustable-rate mortgages:
While an adjustable-rate mortgage is not best for every borrower, it can be an excellent option in many situations.