Adjustable Rate Mortgages (ARM)
Box Home Loans offers Adjustable Rate Mortgages (ARM’s) in a 5/1 ARM term. Adjustable Rate Mortgages differ from fixed-rate mortgages in that the interest rate may go up or down. Many adjustable rate mortgages will start at a lower rate than a fixed rate mortgage. ARM’s are attractive because they offer low initial payments, and help a borrower in some cases to qualify for a larger loan than they would qualify for with a fixed rate mortgage.
Is an Adjustable Rate Mortgage Right for Me?
There are a few additional things borrowers should understand before deciding on an Adjustable Rate Mortgage explained below.
An ARM could be the right loan if one of the following is true:
- Low payments during the initial fixed period are a primary concern
- Borrower does not plan on living in the property long enough for interest rates to rise
If interest rates are high and expected to fall, an ARM loan will help the borrower have a lower interest rate without the need to refinance. If interest rates are expected to rise and a set payment is important to the borrower then a fixed-rate mortgage may be a better option.
For any questions about our Adjustable Rate Mortgages, feel free to chat with a representative immediately, email us, or give us a call at 877 905-0005.
Fixed Rate Period
ARMs come with an initial fixed rate period where the rate or principal and interest payment will not adjust. That fixed period typically range from 3 to 10 years depending on the product you choose. After the fixed period, the rate and payment begin to adjust with the market. Our Instant Quote tool gives you the rates and payments for each option. Please consult your loan officer about the adjustment terms for a given ARM product as they vary per loan program.
Index Rate
After the initial fixed period, ARMs will adjust based on their index. An index represents what certain interest rates are in the financial markets. Most conventional mortgages are tied to the 1 year LIBOR index. LIBOR stands for “London Inter-Bank Offered Rate.” It is based on rates that contributor banks in London offer each other for inter-bank deposits. Essentially, a LIBOR is a rate at which a fellow London bank can borrower money from other banks. Borrowers can easily research the history of this index by searching online for “History of LIBOR Index.” Most government backed loans – such as FHA and VA loans – are tied to 1 Year Treasuries. The index is a variable that changes throughout time which impacts the interest rate of an ARM after the fixed rate period ends.
Mortgage Margin
Every mortgage has a margin that is set for a loan. A margin is a fixed rate that is added to the index value to determine the fully indexed interest rate of an adjustable rate mortgage (ARM). The margin is constant throughout the life of the mortgage. In other words, the margin is fixed.
Caps and Ceiling for Adjustable Rate Mortgages
In addition to the margin, there are other factors that determine the new rate. These are called caps and ceiling. Caps are the limit on the amount the interest rate can increase or decrease each adjustment period. These caps vary by loan program. Please consult your loan officer on the caps and ceilings for the ARM you’re interested in.
