Adjustable Rate Mortgages (ARMS)

1-Month, 6-Month, 1-Year, 3/1, 5/1, 7/1 & 10/1 Treasury or Libor ARMS:     The Adjustable Rate Mortgage, often referred to as an ARM, is a mortgage that has a fixed rate for a limited amount of time and then the rate begins to fluctuate for the duration of the loan.  ARMs are available in many different terms and conditions.  Loans with fixed interest rate periods range from 1-month to 10-years.  At the end of the fixed rate period the rates may start to adjust.  Many of these loans have a cap on the amount of adjustment per year and the amount of adjustment over the life of the loan.

The best ARM products will not adjust more than two percent per year and will have a cap, or maximum adjustment, of five to six percent over the life of the loan.  Most Adjustable Rate Mortgages are amortized over a 30-year period and act similar to the 30-year fixed rate mortgage with regard to principal reduction.

Who should apply for this type of loan?     Many borrowers are good candidates for this type of loan.  These loans typically offer much lower rates than the standard 30-year fixed rate mortgage option and they can offer security during the guaranteed fixed rate period of the loan. 

The prime candidate for this type of loan is the individual that knows how long they will be living in the property.  For instance if a person or family knows that they will only be in the home for 5 years, then a 5/1 ARM would be the perfect mortgage instrument.  The rate would be fixed for five years and would begin to adjust at the beginning of the sixth year.  The adjustment of the loan would not matter since the goal is to sell the property before the adjustment period begins.

Final Note:     Some important points about ARMs;

1. The typical fixed rate periods of an ARM are 1-month, 6-month, 1-year, 3-years, 5-years, 7-years and 10-years. 
2. Most ARM products are convertible.  This means when the loan begins its adjustment period, for a nominal fee, the lender will convert the remainder of the mortgage to a fixed rate mortgage at the prevailing market rate.
3. The best/lowest ARM products tend to be based on the LIBOR Index, but the most stable index is the Treasury.  Other ARM types include rates based on the COFI and the MTA.
4. The best ARMs typically have an adjustment cap of two percent per year and five to six percent over the life of the loan.
5. Never, never ever pay a prepayment penalty.  The only people that should accept an Adjustable Rate Mortgage with a prepayment penalty are people with poor credit.  (Typically typified by a Beacon Score of 640 or less.  Other factors may also apply.) – See Non-Prime loans.
6. If financing investment property with this type of loan, it may be necessary to pay a discount point in order to get the loan.  Depending on the financial goals for the investment, paying up to one discount point may be worth the investment.

“Purchasing or refinancing a home is the largest single investment decision an individual or a family will ever make.  It should be a thoughtful, systematic financial decision.  Emotion should only become involved in the financing process after all financial options have been analyzed.”