Adjustable Rate Mortgage

Adjustable Rate MortgageYou may want to purchase a new home but know that you’ll be moving to a new location within a few short years.

One option to consider in this situation  is an Adjustable Rate Mortgage loan. This way, you can be assured of low interest rates during the first few years of your mortgage, which may be all that you require since you won’t be living in the home for an extended period of time.

Definition of an Adjustable Rate Mortgage

A mortgage with adjustable rates, also known as an ARM, is a loan arrangement in which the rate is not fixed like a conventional loan, but will most likely change at a predetermined time.

For example:

  • A 5/1 year ARM means you have a fixed rate for the first five years of the loan, but then it adjusts annually each year after that.
  • Another type of ARM is the 3/3 year ARM, which has a fixed rate for the first three years, and then adjusts every three years after that.

Most changes in the rate will be due to fluctuations in either the prime rate or Treasury Bill rate.

As noted above, one of the main advantages of taking out this kind of loan is to secure lower rates during the first few years that you hold it.

The Initial Rate of Your ARM Will Usually Be Quite Low

ARM LoanThe main advantage of taking out an ARM will be to secure a low mortgage rate. As a borrower, you desire a level of insurance against the possibility that the rate you are paying will adjust to a much higher level in the future, due to fluctuations in the prime rate.

You are protected by a maximum interest rate increase or ceiling. This is the highest level of interest to which the rate of your mortgage can be adjusted to. This ceiling is usually reset on a yearly basis, meaning that the ultimate rate may be either higher or lower than the one you were expected to pay.

What is the Typical Rate Curve of an ARM?

There is no guaranteed “rate curve” for an ARM. The rate you pay may be fixed during the first few years by your lender. However, at a certain point, the rate you pay will fall in line with the national prime rate. As a result, the rate you are charged may fluctuate quite a bit during the time you are subject to the terms of your agreement.

We can help you with understanding the advantages and risks involved in this type of loan. Give our office a call and let’s take a look at your options.