1, 3, 5, 7, and 10
Year Adjustable Rate
Mortgages as well as 1, 3, and 6 Month ARMs.
An Adjustable Rate Mortgage (ARM) is a mortgage loan that is most widely known for its low starting interest rate (when compared to the 30 & 15 year mortgage loans). This 'low' introductory rate is used to calculate the mortgage payment for a specified period of time. Once this introductory period is over, the interest rate is adjusted periodically based on a pre-selected index. Commonly used indexes are the yields on the one-year Treasury Bill and the LIBOR ( London Inter Bank Offer Rate). The new interest rate is determined by adding this index to a set margin (which is determined by the lender). Although there are a variety of adjustable rate mortgage programs available, the most common program is the One Year Adjustable Mortgage (one Year ARM). The interest rate on the one year ARM is adjusted once each Year, for 30 years. APR's on variable rate loans are subject to increase but may decrease from year-to-year. The borrower should be prepared to handle an increase in his/her monthly payment (should the index rate increase).
Other indexes used are the Cost of Funds
Index (COFI), Cost of Savings (COSI), and the Prime Rate.
ARM's are also the choice for many
homebuyers who only plan on keeping the home for a short period of time. For
example, if a home buyer only plans on staying at the location for 3 years, then
a 3/1 ARM could easily save the homebuyer several thousand dollars a year in unnecessary
interest payments while still making the same progress towards the
principle as they would on a 30 year fixed rate loan.
Most of the Interest Only loan options are based on ARM's.
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