Mortgage and Refinancing Information Channel:
We would like to thank the local libraries, schools, and universities for recommending students to visit us when doing research on any of our information topics.
Is an ARM Right For You?
Let's start by taking a look at 7 key elements of an adjustable rate mortgage:
1) ARM defined: While a fixed rate loan is constant and never changes throughout the life of the loan, an adjustable rate mortgage changes periodically. The interest rate of an ARM goes up and down based on whatever external index it is tied to. Add the lender's "margin" to that, and you've got the rate. Add costs to that, and you've got the APR.
Other considerations include the fixed period, the adjustment date, and the adjustment interval. There are built in risk management devices such as caps, conversion clauses, rate ceilings, rate floors, periodic payment caps, and periodic rate caps.
So, while fixed rate loans stay constant and are fairly straightforward, future payments on ARMS is an unknown, and they go up and down depending on a variety of variables.
2) Index: An adjustable rate mortgage is tied to an external index. If you look in the financial section of the paper today, you might see a chart posted for the 1 year constant maturity treasury index, also called the CMT, otherwise known as the 1-year "T-bills". You might see a graph, showing the T-Bills rising and falling in value over time.
About 50% of all ARM loans are tied to the 1 year T-Bills. If this is the index used on your loan, then your house payment will rise and fall alongside the T-Bill index (basically).
This is just one example of an index used for ARMs. There are indeed several, and some are more volatile than others. The point is that if that index goes up, the ARM can go up. If that index goes down, the ARM can go down.
3) Margin: Lenders' add a specific percentage to the index. This is called "margin". Put another way, the adjustable rate equals the interest rate tied to the index plus the lenders' margin. For example, if the T-bills are going for 1.5%, and the margin is 2.5%, then the ARM interest rate is basically 4%.
What's important to know is that different lenders charge different margin, and margin is different from one index to the next. So, just because the margin is cheaper on an ARM tied to T-bills, doesn't necessarily mean it's the best deal. What if the interest rate on a different index, say the LIBOR, is lower? Maybe the margin is higher? Keep your eyes open, and compare the combination of both margin and index, when looking to compare ARMs.
4) Fixed Period: The terms of the loan typically begins with a fixed period of anywhere from 1 month to 5 years or more, where the rate is not adjusted and stays constant (like a fixed rate loan). A 1 month ARM, for example, has a starting fixed period of 1 month, whereas a 1 year ARM has a starting fixed period of 1 year.
5) Adjustment Interval: After the fixed period has elapsed, then there will be an adjustment date in which the rate is modified to conform to the index within the terms of the loan. This interval is typically 1 year, 3 years, and 5 years, but a wide variety of intervals exists.
In other words, you start with a fixed period and the rate is fixed. Then you get to the adjustment date, and the rate goes up or down depending on the index and the terms of the loan. Then you go into the adjustment period, let's say the interval is 1 year, so for 1 year the rate stays the same. Then you get to the next adjustment date, and the whole process repeats itself.
6) Caps: There are built in devices to the ARM that helps manage the risk. For example, most loans incorporate an interest rate ceiling into their terms. The interest rate charged can never exceed the agreed upon ceiling. There is also usually a corresponding interest rate floor (the rate can never drop below this). There is usually a periodic rate cap, that limits the amount the rate can go up or down (during the adjustment period), irrespective of the index. There may be more in the terms of your loan worth exploring, but the important point here is that Caps help control risk. They make the ARM manageable.
7) Conversion Clause: What if 5 years go by, and the rates are still low, and now you're fairly certain you'll be living in your home for the next 10 years. In this instance, it might be wise to switch over from an ARM to a fixed rate. Many loans contain a conversion clause allowing you to convert the loan to a fixed rate mortgage. There is sometimes a fee associated with this provision. Also, the terms of the conversion clause may require a period of time to elapse before it becomes available.
So, is an ARM is right for you?
Of course, that's a question that only you can decide. However, here a few possibilities:
1. Buying Power: - Adjustable Rate Mortgages, in the right market, can allow buyers to purchase higher valued homes with a lower, initial, monthly payment.
2. Short Term Home Ownership: - The average home owner lives in one residence 7 to 8 years (not 30 years). Do you know how long you'll be there? If you have confidence that you're only there for the short term, then an ARM could save you money.
3. Risk versus Reward: - What is your level of comfort with risk and how prepared are you to adjust your finances accordingly? If rates stay steady or decline over the long term, an ARM could offer you the greatest possible savings.
Needless to say, a word of caution is appropriate here. Let's not forget the tried and true warhorse of the fixed rate loan. Fixed rate offers the least amount of risk to the borrower over the long term. There are many unknowns, many variables, and many terms and conditions that need to be considered when looking into an ARM.
The best place to start is always to evaluate fixed rate loans, as a benchmark, and then branch out your options from there. Know the current rates and get a feel for the "trend". Compare several loan offers before signing on the bottom line, and explore all the variables that go into these loans, including the 7 mentioned in this article. Talk to 3 or 4 lenders during this process, to see who you like doing business with. Above all, don't just fixate on the monthly payment. Shop rate, and review the terms of the loan offers.
We provide a free rate-watch at our website, along with a directory of lenders and resources, or you can go to any search engine on the internet and find other useful sites and tools out there.
We've enjoyed providing this information to you, and we wish you the best of luck in your pursuits. Remember to always seek out good advice from those you trust, and never turn your back on your own common sense.
Sincerely, Tom Levine
Copyright 2004, by LoanResources.Net
Publisher's Directions: This article may be freely distributed so long as the copyright, author's information, disclaimer, and an active link (where possible) are included.
About The Author
Tom Levine provides a solid, common sense approach to solving problems and answering questions relating to consumer loan products. His website seeks to provide free online resources for the consumer, including rate-watch, tips and articles, financial communication, news, and links to products and services. You can check out Tom's website here: http://loanresources.net, or you can email Tom at [email protected]
MORE RESOURCES updated Tue. May / 24 / 2022
Today's mortgage refinance rates rise – May 11, 2022 Bankrate.com
Trends in Mortgage Refinancing Activity Freddie Mac
The Mortgage Refinance Rush Has Cooled, But HELOCs Can Unlock Housing Wealth - Hawaii Business Magazine
The Mortgage Refinance Rush Has Cooled, But HELOCs Can Unlock Housing Wealth Hawaii Business Magazine
Can You Refinance a Reverse Mortgage? Investopedia
When to Refinance Your Mortgage Business Insider
Refinancing an FHA loan to a conventional loan Fox Business
Today's Mortgage, Refinance Rates: May 8, 2022 | Rates Will Likely Remain Above 5% - Business Insider
Inheriting a House With a Home Equity Loan Investopedia
How To Refinance A Second Mortgage | HEL, HELOC, Piggyback The Mortgage Reports
Why Mortgage Borrowers Will Want to Avoid the Prepayment Penalty If You Plan to Move or Refinance - NextAdvisor
Why Mortgage Borrowers Will Want to Avoid the Prepayment Penalty If You Plan to Move or Refinance NextAdvisor
Today's Mortgage, Refinance Rates: May 11, 2022 | High Inflation Means Rates Will Likely Stay Elevated - Business Insider
Today's Mortgage, Refinance Rates: May 11, 2022 | High Inflation Means Rates Will Likely Stay Elevated Business Insider
What is mortgage recasting and why should you do it? Fox Business
How Piggyback Loans Work | Mortgages and Advice | US News U.S News & World Report Money
Pros and cons of an adjustable-rate mortgage (ARM) Bankrate.com
What Is a Mortgage Loan Officer? | Mortgages and Advice | US News U.S News & World Report Money
Today’s mortgage refinance rates: Steady shorter terms offer best savings chances | March 17, 2022 - Fox Business
Today’s mortgage refinance rates: Steady shorter terms offer best savings chances | March 17, 2022 Fox Business
New mortgage refinance programs from Fannie Mae and Freddie Mac are expanding to reach more homeowners - CNBC
New mortgage refinance programs from Fannie Mae and Freddie Mac are expanding to reach more homeowners CNBC
Mortgage Fraud | The Ascent The Motley Fool
20-year mortgage refinance rates fall, giving buyers savings opportunity | March 16, 2022 - Fox Business
20-year mortgage refinance rates fall, giving buyers savings opportunity | March 16, 2022 Fox Business
Today's refi rates move higher – May 9, 2022 Bankrate.com
Should you refinance your mortgage now? Consider these factors The Seattle Times
Today's Mortgage, Refinance Rates: May 13, 2022 | Rates Increase for the Second Week in a Row - Business Insider
Today's Mortgage, Refinance Rates: May 13, 2022 | Rates Increase for the Second Week in a Row Business Insider
Today's Mortgage, Refinance Rates: May 16, 2022 | Rates Have Increased Over 2% Since Last Year - Business Insider
Today's Mortgage, Refinance Rates: May 16, 2022 | Rates Have Increased Over 2% Since Last Year Business Insider
Today's Mortgage, Refinance Rates: May 17, 2022 | Rates May Be Moderating Slightly - Business Insider
3.8 million homeowners would still benefit from refinancing amid rise in mortgage rates, says Black Knight - Fox Business
3.8 million homeowners would still benefit from refinancing amid rise in mortgage rates, says Black Knight Fox Business
Jumbo Loan Refinance Guide | 2022 Rates and Guidelines The Mortgage Reports
Still time to lock in a lower rate: Today's 30-year mortgage refinance rates fall | Feb. 9, 2022 - Fox Business
Still time to lock in a lower rate: Today's 30-year mortgage refinance rates fall | Feb. 9, 2022 Fox Business
How to refinance your mortgage, a step-by-step guide The Washington Post
Survey finds 74% of homeowners haven’t refinanced despite historically low mortgage rates - Bankrate.com
Survey finds 74% of homeowners haven’t refinanced despite historically low mortgage rates Bankrate.com
3 Reasons to Refinance Your Mortgage Despite Rising Rates The Motley Fool
After Losing Her Home in a Fire, This Teacher Needed a Fresh Start. A Mortgage Refinance Helped Her Do It - NextAdvisor
After Losing Her Home in a Fire, This Teacher Needed a Fresh Start. A Mortgage Refinance Helped Her Do It NextAdvisor
Should You Refinance Your Mortgage in 2022? The Motley Fool
Plunging Mortgage Rates Mean Refinancing Is Back on the Table for 2 Million Borrowers - The Motley Fool
Plunging Mortgage Rates Mean Refinancing Is Back on the Table for 2 Million Borrowers The Motley Fool
Mortgage and real estate news this week: Affordability squeeze tightens, and refinancing must-knows - Bankrate.com
Mortgage and real estate news this week: Affordability squeeze tightens, and refinancing must-knows Bankrate.com
15 of the best mortgage refinance companies for 2021 Fox Business
VA Loan Refinance Options | 2022 VA IRRRL and Cash-Out The Mortgage Reports
Cash-out refinance vs. no-cash-out | What's the difference? The Mortgage Reports
Mortgage Rates Increased to 3.27% Last Week. Here’s What Experts Forecast Amid Rising Inflation and COVID Cases - NextAdvisor
Mortgage Rates Increased to 3.27% Last Week. Here’s What Experts Forecast Amid Rising Inflation and COVID Cases NextAdvisor
Home Mortgage Refinancing Disparities During the COVID-19 Pandemic: Insights for Delaware, New Jersey, and Pennsylvania - Philadelphia Fed
Home Mortgage Refinancing Disparities During the COVID-19 Pandemic: Insights for Delaware, New Jersey, and Pennsylvania Philadelphia Fed
Mortgage Refinance As An Inflation Hedge Surfky.com
What Is a Mortgage Refinance? The Motley Fool
Can You Refinance A VA Loan? Zing! Blog by Quicken Loans
Mortgage refinance: Everything you need to know Fox Business
Unemployed and unable to refinance Marketplace
Best mortgage refinance lenders in 2022 Bankrate.com