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Adjustable Rate Mortgage

The adjustable rate mortgage or ARM is a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. The index could be for example the one year treasury, cd rates or even cost of funds as measured in a defined geographical area. Also referred to as the variable rate mortgage.

A few options are available to fit your individual needs and your risk tolerance with the various market instruments.

ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.

The interest rate and monthly payment can change based on adjustments to the index rate.

6-Month Certificate of Deposit (CD) ARM

Has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.

1-Year Treasury Spot ARM

Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.

6-Month Treasury Average ARM

Has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

12-Month Treasury Average ARM

Has a maximum interest rate adjustment of 2% every 12 months. The treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

An adjustable rate mortgage or variable rate mortgage is a loan secured on a property whose interest rate and monthly repayment vary over time.

Adjustable rate mortgages that have a fixed periods for 3, 5, 7, or 10 years are often called Hybrids. They adjust after the fixed period ends.

Some sub prime ARMS have a pre pay penalty attached to them.If you are quoted a ARM with a pre pay penalty ask if it is a hard or soft pre pay. A soft pre pay will allow you to sell the house with no penalty. A hard pre pay requires you to pay the penalty if you sell or refinance the mortgage before the pre pay expires. Pre pay panalties will vary in the amount required from 60 days interest to 6 months interest.

Cash flow ARM and Option ARM programs, also known as pay option arm or 12 month MTA mortgages, are another type of adjustable rate mortgage which gives you the option to defer interest and pay an effective 1.00% start rate on your mortgage.

Generally, when you select to finance your mortgage on an ARM (Adjustable Rate Mortgage) you will want to make sure that your pre-payment penalty does not exceed the fixed period of your loan. Example: If you plan on only living in the house for 2-3 more years and you select a 3/1 ARM, you probably do not want to have a pre-payment penalty that lasts for 5 years.

Hybrid programs are an excellent way to keep your payment lower if you plan to refinance or sell the home in just a few years.

An Arm is a good loan type for people who want to get into a bigger house right now with an upfront lower payment. It is especially good for: those who know their income will increase within the next few years but don't want to wait 2 years for this house, those families that are supported by only one income but the other is preparing to go back to work, and those who want to maximize their cash flow during the first few years of moving into a new house.

A mortgage which has an start rate that adjusts periodically, according to an index. Payments will be low, when interest rates are low and will increase as rates rise. CAPS limit the ARM rate & can adjust during the term of the loan. Most ARM rates are lower than fixed-rate.

A very common index used in calculating Adjustable interest rates is the LIBOR index. When your mortgage adjusts, you can figure out your new interest rate by adding the margin to the LIBOR rate. Check your loan documents to be sure you are using the correct index.

The interest rate on ARM's are made up of two components, the index and the margin. When choosing between different ARM programs, it is prudent to understand the volatility of the underlying indices as well as the margins.

Adjustable rate mortgages are also great for those that have poor credit and are consolidating debt. The adjustable rate will allow you to consolidate your bills and give you the lowest payment that you qualify for while you allow your credit scores to rise. Once they are higher, most borrowers will refinance into an even better rate, or into a fixed rate loan.

An adjustable rate mortgage, also known as an ARM, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes. Ask a Mortgage Professional if a ARM is right for you?

For more information regarding this topic, please call Mike Williams at 516-921-9000 or email mwilliams@northshorefunding.com.