What is Adjustable Rate Mortgages?

What is Adjustable Rate Mortgages (ARM)?

When considering purchasing real estate, whether a private dwelling, or investment property, it is wise to be informed as to the different types of mortgage loans available, as well as to have a prior sense of which type of loan will work best for you.

While Fixed Rate Mortgages have been the traditional way that most mortgage holders have assumed property in the past, Adjustable Rate Mortgages are becoming a reasonable alternative for today’s property buyer.

An Adjustable Rate Mortgage, otherwise known as an ARM loan, offers a flexible interest rate, which can change periodically, through-out the length of the mortgage. Adjustable Rate Mortgage plans often offer a low introductory rate of interest, making them a good choice for investors who may not be planning to personally hold the mortgage through-out its fifteen to thirty year life span. Also, because of the low introductory interest rates, many buyers opt to take out an Adjustable Rate Mortgage loan when interest rates are high. These buyers have already planned to refinance the home at another date, when interest rates have gone down again.

When considering an Adjustable Rate Mortgage it is important to know before you buy, how and when your interest rates will change through-out the life of the mortgage. In general an Adjustable Rate Mortgage Index (controlled by either US Treasury Bills, or The Federal Housing Finance Board’s Contract Mortgage Rate) will determine how your interest rates are calculated over time. These Indexes will determine how your mortgage payments will fluctuate, as the housing market fluctuates. Before buying any propety, it is best to know how your specific lender will calculate the rate of interest on your mortgage, as the guidelines for interest rate calculation change from lender to lender. It’s a good idea to ask who controls the index which will affect the mortgage you are buying.

The Margin (or spread) which is also specific to each lender, is another important point to focus on, when talking with your lender. Because the margin has a direct influence on the amount of your mortgage payments, you will want to know what Margin is being used by the lender you decide on. The Margin is added to the Index, in order to cover the lender’s costs, and usually remains the same over the life of a mortgage. Simply comparing the margins of several different lender’s and selecting the lender who can offer the lowest Margin, can potentially save thousands of dollars, over the life of a mortgage.

It is also important for you to know how often your interest rate will be recalculated, as this process also differs between lending institutions. Finding a lender who will recalculate mortgage interest rates no more than once a year, can help make an Adjustable Rate Mortgage easier for the average buyer to handle.

In order to find the best possible ARM, when selecting a lender for your mortgage, remember to ask the following questions:

  • Which Index will be used to calculate your interest rates?
  • What is the Margin (or spread) the lender will apply to the mortgage rate?
  • How often will the interest be recalculated?
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