* Special ARMs
There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed-rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation.
* Standard ARM Programs
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
This type of ARM has a maximum interest rate adjustment of 1% every 6 months. The 6-month (CD) index is generally considered to react quickly to changes in the market.
* 1-Year Treasury Spot ARM
The 1-year Treasury Spot ARM has as a maximum interest rate adjustment of 2% every 12 months. This index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.
* 6-Month Treasury Average ARM
This index has a maximum interest rate adjustment of 1% every 6 months. It 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
The 12-month Treasury Average ARM has a maximum interest rate adjustment of 2% every 12 months. It generally reacts more slowly in fluctuating markets, so adjustments in the ARM interest rate will lag behind some other market indicators.
* Introductory Rate ARM's
These are the most adjustable rate loans (ARMs) and have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment. ARM Glossary of Terms
Index - The index of an ARM is the financial instrument that the loan is "tied" to, or adjusted to. The most common indices (or indexes) are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds (COFI). Each of these indices moves up or down based on conditions of the financial markets.
Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example, if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5%, depending on the index and the amount financed in relation to the property value.
Interim Caps - All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of 6 months or a year. There are loans that have interest rate caps of 3 years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or "negative amortization." These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps. Click Here For Next Page |
