786-344-8004
  • Facebook
  • Instagram
  • LinkedIn
  • Pinterest
  • Twitter
  • YouTube
All Florida Home Team

All Florida Home Team

  • Our Listings
    • Featured Listings
    • Sold Listings
    • Featured Open Houses
    • Featured Virtual Tours
  • Communities
  • Buying
  • Selling
  • Lifestyle
  • Resources
    • FREE Guide to Selling Your Home During COVID-19
    • Newsletter
  • About Us
    • Meet the Team
    • Our Blog
    • Testimonials/Reviews
    • Video Testimonials
  • Contact
    • Your Referral Help Find Cure for Diabetes
    • Empty Nester: How to Sell the Place You Call Home
Advanced Search
Home Valuation

Adjustable Rate Mortgages – The Basics

March 27, 2018 by Denise Madan

Spread the love

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.

Filed Under: Buying Tagged With: buying real estate, home buyer, home loan, home mortgage, lender, mortgage, real estate mortgage

Recent Posts

  • Can You Sell an Outdated House?
  • ABCs of Construction Loans
  • Comparing New Construction vs Resale
  • Downsizing Made Easy
  • ALL FLORIDA HOME TEAM AND WHAT YOU SHOULD KNOW ABOUT THE FLORIDA HOMESTEAD EXEMPTION

Categories

  • Buying
  • Featured
  • Lifestyle
  • Market Reports
  • Selling
  • Uncategorized

Search Tools

  • Basic Search
  • Advanced Search
  • Map Search
  • Address Search
  • MLS Number
  • Home Valuation

Account Tools

  • My Account
  • Signup
  • Login

Denise Madan

All Florida Home Team
14261 Commerce Way Suite
102 Miami Lakes, FL 33016

786-344-8004
denise@denisemadan.com

Equal Housing Opportunity | Realtor | MLS

Another BREW by Ballen Brands