ARM's Adjustable Rate Mortgages

What Are Adjustable Rate Mortgages? An adjustable rate mortgage (ARM) is a mortgage in which the interest rate may change over time in a specific amount of years. With an adjustable rate mortgage, the interest rate may change periodically, usually in relation to an index (London Interbank Offered Rate, or LIBOR), and payments may 'adjust' up or down. Unlike fixed-rate mortgages, homeowners with this type of home loan aren’t guaranteed the same interest rate, or principal and interest payment for the duration of their loan. The risk of an increasing interest rate is something that borrowers should consider when evaluating an adjustable rate mortgage for their home financing. If you're looking for guidance, working with a mortgage broker in The Woodlands can help you navigate your options. 

Adjustable Rate Mortgage or ARM is a mortgage loan where the note will adjust periodically based on the set index.

Arm Rate Formula: Index + Margin = Rate

Advantages of ARM

Allows a borrower to lower their initial monthly payment upfront, which is great for those planning to move in a few years or before the end of the initial interest rate period expires and the adjustment period starts. It is beneficial to borrowers who are expecting an increase in their income, rate financial borrowers who believe interest rates will go down in the future, and those who see it as a short-term residence instead of renting. Relocating but not sure how long the job will keep you at the location? An ARM may be a suitable choice. 

Disadvantages of ARM

If you keep the property, you might have to refinance in the future, incurring more closing costs. The interest rate will increase in a rising rate environment since the index is directly tied to the rate. An increase in the interest rate will result in higher future monthly payments and could reduce or prolong the accumulation of equity in the property. It is not ideal for low credit clients as future refinancing might be hard to qualify for.

Types of Hybrid ARMs – Annual rate changes can make budgeting difficult if your payment is going up and down. Calculate your monthly payment in the worst-case scenario for each adjustment period, and if it fits your budget and is an acceptable level of risk, the ARM can save you money if used properly. ARMs should not be used for long-term purposes for most homeowners. We’ll help you choose the best option:

3/1 ARM – Interest rate is fixed for the first 3 years. After 3 years, the rate can change based on the index and margin.

5/1 ARM – Interest rate is fixed for the first 5 years. After 5 years, the rate can change based on the index and margin.

7/1 ARM – Interest rate is fixed for the first 7 years. After 7 years, the rate can change based on the index and margin.

10/1 ARM – Interest rate is fixed for the first 10 years. After 10 years, the rate can change based on the index and margin.

Interest Rate Caps

Pay attention to the details of the caps. Depending on the type of mortgage selected, interest rate caps offer some protection for homeowners who opt to finance their home with an adjustable rate mortgage. An interest rate cap sets a limit on the amount the interest rate can increase. There are two types of interest rate caps: a periodic adjustment cap limits the amount an interest rate can increase or decrease between two adjustment periods after the first adjustment, while a lifetime cap limits the amount the interest rate can increase over the duration of the loan.

Most ARMs have caps that limit the lender puts on the amount that the interest rate or mortgage payment may change at each adjustment, as well as during the life of the mortgage. With an ARM, you typically have the benefit of lower initial rates for the first year of the loan. Plus, if interest rates drop and you want to take advantage of a lower rate, you may not have to refinance as you would with a fixed-rate mortgage. An ARM may be especially advantageous if you plan to move after a short period of time.

Payment Caps

Payment caps follow a similar structure as interest rate caps. Payment caps limit the amount the monthly payment may increase from one adjustment period to another, instead of the amount the interest rate can increase.

Get Pre-Qualified for An Adjustable Rate Mortgage

With flexible options available, program expertise, and 5-star customer service, we’ll work with you from application to close to ensure a smooth loan process and create a loan program that meets your financial needs and goals. Your situation is unique, and we’ll help you navigate the various ARM options to choose together with guidance from a mortgage broker in The Woodlands.