They offer a lower initial rate, allowing you to qualify for a larger mortgage. Your rate of interest will adjust periodically based upon an index that reflects current interest rates.
ARM adjusts at various increments and periods. The start rate is usually below the fixed rates. The initial period, or the term until the rate adjusts, can be as little as six months or as long as ten years. After the initial rate adjustment the ARM loan usually adjusts each year. Know what your terms are as disclosed on the note before you sign.
To protect the buyer, ARMS have interest rate caps. These terms are disclosed on the note. The customary manner in which lenders show their cap rates using the example above would be: 1/5 with the annual cap being the first number. A conventional loan typically has a 2/6 annual and life of loan cap. These caps remain in place through out the life of the loan and are not changed unless the lender is in agreement.
Types of Arms
The types of ARM loans are many and are different in their benefits. If you see yourself only staying in a home or area for a short period, a 30 year fixed rate may be set at a higher rate than what you can get an ARM for.
For example, if you plan on leaving an area in five years, an ARM with 5/1 caps would make sense. The rate would be fixed for five years or the time you are in the home and you would sell the home before the rate would adjust.
Another feature of an ARM is they typically are assumable. This means that when you sell your home with an ARM loan on it, the new buyer could take over your payments and only pay you your equity with a savings of not having to pay any closing costs or a reduced amount.
Mortgage
