What Is An ARM Mortgage Loan, and is it right for me
What is an ARM Mortgage Loan? With over 15 years of experience in the Branson Real Estate market, we’ve helped hundreds of people finance their dream vacation homes and we’ve heard this question often. What is an ARM Mortgage Loan? Is it right for me? While the answer to the last question is up to each individual, we can help with an answer to the first and get you started on finding out if an ARM Loan is right for you.
irst, what does the ARM in an ARM Mortgage loan stand for? ARM stands for: Adjustable Rate Mortgage and this mostly explains itself: these are home loans in which the mortgage rate changes periodically according to the terms of the home loan program. When applying for an adjustable rate mortgage, banks will offer a 1, 3, or 5 year interest lock. After the interest lock period is over, then the rate will adjust each year in accordance with one of the following; the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank’s 11th District Cost of Funds Index (COFI), or others.
Typically the initial rates on these ARM mortgage loans are lower than a long-term fixed rate. As of today (February, 2010) the 30 year fixed rate was 5.24% vs. 3.1% on a 3/1 ARM. The interest rate, and your payments, are periodically adjusted up or down as the index changes. Most ARMS offer CAPS that protect the monthly payment from jumping up too much in any year. The average CAPS in a year is 2% and 6% for the life of the loan.Generally someone who has an initial rate of 4% the rate could not adjust more than 2% each year and then 6% over the life of the loan.
Now that we’ve answered “What is an ARM Mortgage Loan?” the next logical question is “Is an ARM loan right for me?” One might choose an ARM to take advantage of a lower introductory rate and count on either re-selling, refinancing again or simply absorbing the higher rate after the introductory rate goes up–trading lower initial cost for future resale or higher future incomes. Another reason could be if you are planning on moving in a couple of years and won’t be holding onto the home for long. When choosing an ARM Mortgage Loan, one does risk rate increases, but could also take advantage when rates go down by pocketing more money each month that would otherwise have gone toward the mortgage payment.
Hopefully this introduction answered the question, “What is an ARM Mortgage Loan?”. With future articles in this series we will use our Branson real estate knowledge to show you more of the ins and outs of ARM mortgages and all other financing options to help make your vacation home purchase as painless as possible.
Learn more real estate mortgage information and more ARM mortgage information to help you make your decision. You can also read an article about more Adjustable Rate Mortgages and their specifics. Considering buying from Timeshare Companies? Find out how these trying times have affected them as well. Buyers are often encouraged into Paying Points on Loans–but are the lower payments always worth it?