Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) can create the same
kind of stability, as a fixed-rate mortgage. This is a closely
held fact that is true in cases where borrowers learn how
to effectively maximize the ARM’s potential.
With a fixed-rate mortgage, the interest rate remains
the same over the life of the loan. Conversely, with an
ARM, the interest rate changes periodically, typically the
fluctuation correlates with a financial index. Accordingly,
the payments traverse up or down as the index moves.
Most persons are attracted to the adjustable rate mortgage
on account of its initially low initial interest rate and
smaller down payment requirement. However, what some folks
do not know is that, overall, lending institutions will
not charge as much in interest for an ARM as they will for
a fixed-rate mortgage. As a result, the ARM proves to be
considerably less taxing on a person’s financial state,
in addition to, affording him | her the opportunity, in
the long term, to qualify for a larger residential loan.
To follow, these mortgage-related terms help to provide
an understanding as to how in conjunction with the index,
adjustment period, and margin, ARMs operate.
The Index: Across the nation, the majority of lending
institutions link ARM interest rate modifications to the
changes in an "index." Indexes fluctuate up and
down along with the movement of interest rates. For example,
if the index rate moves up, a mortgage rate will go up.
In certain circumstances, a borrower with an ARM will probably
have to make higher monthly payments. On the other side
of the monthly mortgage note, if the index rate goes down,
the monthly payment will correspond.
An Adjustment Period: Unlike the stable fixed-rate, where
the mortgage rate remains the same over the life of the
loan, an adjustable rate mortgage (ARM) is different. Based
on monthly payment changes, the resulting interest rate
result depends upon the term of an ARM. Therefore, monthly
payments are subject to variances from year to year, every
three or five years – contingent upon its terms.
There are certain ARMs that have more frequent interest
and payment changes. An adjustment period transpires when
one rate changes to the next. For instance, a home loan
with an adjustment period of three years is called a one-year
ARM. Hence, the interest rate is subject to change once
every three years.
The Margin: To calculate the interest rate on an ARM,
mortgage companies add a few percentage points to the index
rate. This increase, representative of the "margin,"
can vary from one lending institution to another.