An adjustable-rate mortgage or ARM is a home loan with interest that changes or fluctuates during the life of the loan. The interest rate you pay is linked to an index and is adjusted according to that index.
ARMs are an excellent choice for homebuyers who plan to pay off their mortgage in full within a specific period or those who can handle the changes in rates.
If you are interested in an adjustable-rate mortgage, your reliable mortgage lender shares some of the facts about it you need to know:
1. It’s Not for Everyone
ARMs are a good idea for some people, but they may be a bad fit depending on how you plan to use the mortgage.
2. There Are Several Types
Most ARMs have a fixed-rate period of one or three years, with the interest rate tied to an index. After the fixed-rate period ends, the interest rate on a loan can move up or down. The following are some types of ARMs:
Fully-Indexed Rate ARM:
The interest rate on the loan is tied to an index plus a margin. For example, it might be linked to the one-year treasury rate plus 1%. With a fully-indexed rate ARM, the interest rate can change many times during the life of the loan.
Limited-Indexed Rate ARM:
The interest rate on the loan is tied to an index plus a margin. For example, it might be linked to the one-year treasury rate plus 1%. With a limited-indexed rate ARM, the interest rate can only change once during the life of the loan.
3. You Can Make Changes
An ARM loan works best if you plan to stay in a home for a set period. But if you change your mind, you can always convert your ARM to a fixed-rate mortgage with a refinance.
4. Creditworthiness Helps
The interest rate on an ARM can increase or decrease because the credit score of the person borrowing the money matters. You usually qualify for a lower interest rate if you have a better credit score.
5. They Can Be Tricky
If you’re considering a loan with an adjustable interest rate, think about when you will pay off the mortgage and have enough money to make the higher payments.
ARM Terms You Should Be Familiar With
This is a guide lenders use to measure changes in interest rates. Common indexes include the activity of one, three, or five-year Treasury securities.
Margin is like the lender’s markup. It’s an interest rate representing a part of their operating cost to make the loan. This margin is added to the index to know your loan interest rate. Typically, the margin stays the same during the loan’s term.
The adjustment period is the time between potential rate adjustments. You will likely see figures like 1-1, 3-1, and 5-1. The first figure in every set is the initial period of the loan with the interest rate the same as it was on the closing day. The second figure is the adjustment period which shows the frequency of adjustments that can be made to the interest rate after the initial period ends.
Before going for an ARM, it’s important that you consider certain factors, like how long you intend to live in that house. If you will just live in the property for a relatively short period, then possible higher rates shouldn’t be that much of a factor. Do you anticipate an increase in your income? If that’s the case, the extra money may cover the higher payments you need to make in case rates increase.
Some ARMs may be converted to a fixed-rate mortgage, but the conversion fees can be so high that it negates the savings you would have made with the initial lower rate. Make sure that you check information like the index and the margin rate with the mortgage lender before proceeding with your application.
If you need to learn more about adjustable-rate loans in Sacramento, Hawkins Home Loans is here to help you. Get in touch with our mortgage experts to learn more about our loan solutions!