adjustable rate mortgage, or an "ARM" as they
are commonly called, is a loan type that offers a lower
initial interest rate than most fixed rate loans. The
trade off is that the interest rate can change periodically,
usually in relation to an index, and the monthly payment
will go up or down accordingly.
Against the advantage of the lower payment at the beginning
of the loan, you should weigh the risk that an increase
in interest rates would lead to higher monthly payments
in the future. It's a trade-off. You get a lower rate
with an ARM in exchange for assuming more risk.
For many people in a variety of situations, an ARM
is the right mortgage choice, particularly if your income
is likely to increase in the future or if you only plan
on being in the home for three to five years.
Here's some detailed information explaining how ARM's
With most ARMs, the interest rate and monthly payment
are fixed for an initial time period such as one year,
three years, five years, or seven years. After the initial
fixed period, the interest rate can change every year.
For example, one of our most popular adjustable rate
mortgages is a five-year ARM. The interest rate will
not change for the first five years (the initial adjustment
period) but can change every year after the first five
Our ARM interest rate changes are tied to changes in
an index rate. Using an index to determine future rate
adjustments provides you with assurance that rate adjustments
will be based on actual market conditions at the time
of the adjustment. The current value of most indices
is published weekly in the Wall Street Journal. If the
index rate moves up so does your mortgage interest rate,
and you will probably have to make a higher monthly
payment. On the other hand, if the index rate goes down
your monthly payment may decrease.
To determine the interest rate on an ARM, we'll add
a pre-disclosed amount to the index called the "margin."
If you're still shopping, comparing one lender's margin
to another's can be more important than comparing the
initial interest rate, since it will be used to calculate
the interest rate you will pay in the future.
An interest-rate cap places a limit on the amount your
interest rate can increase or decrease. There are two
types of caps:
1. Periodic or adjustment caps, which
limit the interest rate increase or decrease from one
adjustment period to the next.
2. Overall or lifetime caps, which
limit the interest rate increase over the life of the
As you can imagine, interest rate caps are very important
since no one knows what can happen in the future. All
of the ARMs we offer have both adjustment and lifetime
caps. Please see each product description for full details.
"Negative Amortization" occurs when your monthly
payment changes to an amount less than the amount required
to pay interest due. If a loan has negative amortization,
you might end up owing more than you originally borrowed.
None of the ARMs we offer allow for negative amortization.
Some lenders may require you to pay special fees or
penalties if you pay off the ARM early. We never charge
a penalty for prepayment.
Contact a Loan Counselor
Selecting a mortgage may be the most important financial
decision you will make and you are entitled to all the
information you need to make the right decision. Don't
hesitate to contact a Loan Counselor if you have questions
about the features of our adjustable rate mortgages.