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Adjustable Rate Mortgage (ARM)

An Adjustable Rate Mortgage is generally referred to as an ARM loan. The interest rate and monthly payment on an ARM are subject to change over the term of the loan. These changes are often set to occur annually, but could be as seldom as every three to five years depending on the terms of your loan.

Some ARM products combine features of a fixed-rate loan with those of an ARM loan. The interest rate is fixed for a set initial period. For example in a Conventional 5/1 ARM, the rate is fixed for five years and then can vary each year thereafter based on a specific interest rate index, plus an additional amount (margin) until the loan is paid off. The rate changes during the life of the loan are tied to an index rate that is established at the time of application, such as the London Interbank Offered Rate (LIBOR). Interest rates can go up on these mortgages, and depending on the terms of the loan, may also go down. There are usually limits (caps) placed on the amount that rates can change. 

There are two types of caps that limit the amount of rate adjustments in an ARM.

  1. Periodic caps that limit the interest rate increase/decrease from one adjustment period to the next.
  2. Lifetime caps that limit the interest rate increase/decrease over the life of the loan.

All dwelling-secured consumer ARM loans have a lifetime limit on the interest rate increase. ARM loans may also have a rate floor, being the lowest rate that can apply at any time.

Download a Free Booklet About ARMs

More information on ARM loans can be found in the booklet title "Consumer Handbook on Adjustable-Rate Mortgage" published by the CFPB.Download this CFPB Booklet.

It is important to choose home loan terms that fit your budget and your financial objectives. Here is a closer look at the pros and cons of an adjustable rate mortgage.

Advantages of an Adjustable Rate Mortgage

  • Lower initial principal and interest payments, as compared to a fixed-rate loan.
  • If rates drop, payments may become lower without refinancing.

Disadvantages of an Adjustable Rate Mortgage

  • Exposure to the risk of possibly significant payment increases if interest rates increase.

Borrowers Likely to Choose an Adjustable Rate Mortgage

  • Anyone who is confident that he or she can continue to make payments even if principal and interest amounts increase significantly.
  • Anyone who believes that rates will remain low or even decrease and wishes to easily take advantage of lower principal and interest payments.
  • Anyone that believes they will be moving within the initial period (five years in a 5/1 ARM).

Request a Free Consultation or Apply for a Mortgage Today

Find out how 1st Mariner Mortgage can help you with your residential Adjustable Rate Mortgage (ARM). If you are interested in a VA loan, contact our VA loan specialists to learn more today. Our representatives are ready to assist you.

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