Posts Tagged ‘fixed’

ARM loan mortgage – Adjustable Rate Mortgage

An adjustable  rate mortgage, commonly refered to as an ARM loan is a loan where the interest rate adjusts periodically based on a variety of indicies. There are different variations of an ARM loan some of which have a fixed rate for a certain period of time such as 3, 5, 7, or 10 years and after that period it turns to an adjustable rate and floats based on certain indicies.

There are also many other forms of an ARM loan including interest only ARM, balloon rate ARM, and negative amortization ARM. All of these types of loans have pros and cons, it’s knowing when to get the appropriate loan at the appropriate time that saves you money.

As mentioned earlier usually there is an initial interest rate for a certain period of time, usually 3, 5, 7, or 10 years. After this time period has expired the interest rate is adjusted based on the certin indicies.  There are caps on ARM loans interest rates which are usually about 5%  on top of the initial interest rate. So if your initial rate was 6% the most it could increase would be to 11% (pretty expensive if you ask me).  There is also usually an option to turn the ARM mortgage to a fixed rate for an additional fee. There is usually a prepayment fee on ARM loans as well.

A great time to consider an ARM loan is when you plan to be in your current home for less than 3 or 5 years and current interest rates are low. You can do an ARM loan for 3 or 5 years and the rate will be fixed for that amount of time and take advantage of the lower rate. When you are ready to move in 3 to 5 years you will be able to sell the house and purchase your next house and start the process over. You won’t even have to worry about the variable or floating interest rate.