Welcome or Register
Back to Table of Contents

Adjustable Rate Mortgages - The Basics

An adjustable rate mortgage (ARM) has an interest rate that fluctuates periodically. This is in contrast to a fixed rate mortgage, which always has the same interest rate.

Every ARM has basic components:

  1. An index
  2. A margin
  3. Adjustment Period
  4. An interest rate cap
  5. An initial interest rate

The Index

An ARM’s interest rate is tied to one of many economic indices, some examples of which are the 1-year constant maturity Treasury security, the Cost of Funds Index, or the London Interbank Offered Rate. Different indices move at different rates so know the characteristics of the index used for your ARM.

The Margin

The interest rate for your ARM will be calculated by adding a margin to the interest rate from the index. The margin is basically the markup charged by the lender that allows them to make a profit off of your loan, such as adding 2% to the index, where the 2% is the margin. The margin of your loan usually does not fluctuate.

The Adjustment Period

The Adjustment Period controls when and how often your interest rate changes. For example, if your ARM has an adjustment period of 1 year, your interest rate will be subject to change at the end of each year and your monthly mortgage payment will be recalculated to reflect this change.

The Interest Rate Cap

Interest rate caps are built into the loan to protect the borrower from drastic interest rate fluctuations. The caps limit how much the interest rate or monthly payment can change at the end of each adjustment period. An ARM can also have a cap for the life of the loan. For example, during the life of a loan, the interest rate can only be increased by 5%.

The Initial Interest Rate

The Initial Interest Rate is the interest rate that you start with at the beginning of your loan period. The length of time your loan stays at this rate is built into the loan. For example, you may stay at the initial interest rate for 1 year, 5 years, or another length of time depending on your specific mortgage. This type of ARM is generally referred to as a Hybrid ARM. The initial interest rate for an adjustable rate mortgage is generally lower than that of a fixed rate mortgage.

Back to Table of Contents

Thank you for visiting today. If this is your first visit, take your time and look around. I have plenty of information and resources available to you. If you are a return visitor, thank you. I would love to hear from you and tell you how I can serve all your real estate needs.

agent photo
Curtis and Patricia Sheets
16503 Booker T Washington Hwy
Moneta, VA 24121
Phone: (540) 293-1033
Fax: (888) 629-1611
Email:
Curtis@LoveToSellYourHome.com
Patricia@LoveToSellYourHome.com

Testimonials

Curtis and Pat are very courtious and professional. You'll get top of the line service and they will go out of their way to make sure you're satisfied. They treat you like family and stay in touch. We couldn't have asked for better realtors or friends! Tara Davidson Fain
We would like to take this opportunity to thank you for helping us find a great home to live in. We first spoke to you two years ago. At that time, you knew that we were not yet ready to purchase a home or to move. Still, you showed us a few houses. You also took the time to show us some of the highlights of the area, such as the Roanoke Star and the Market District. Over the following two years, you always kept in touch. You sent us nearly 350 houses to review and personal notes about how we were. When we sold our house in NYC and came down to Roanoke, you took us around again and we found a dream house. We still had business to finish in NYC and you took charge, getting an inspection of the home and arranging for a closing agent to handle the purchase. Thank you for finding just the right home and for treating us as friends, not as customers. If any of our friends wants to make a move out here, we would recommend you and ReMax without reservation. Alfred and Clara Rodney
We bought our house with Patricia & Curtis. They were very knowledgeable, fair and honest and very helpful. We would highly recommend them to anyone looking to buy or sell real estate. It was a pleasure to visit houses with them. Jean-Luc and Regine Willem
View All

Thank you for visiting today. If this is your first visit, take your time and look around. I have plenty of information and resources available to you. If you are a return visitor, thank you. I would love to hear from you and tell you how I can serve all your real estate needs.

Real Estate Websites by iHOUSEweb iconiHOUSEweb | Admin Menu