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Adjustable Rate Mortgage FAQ's
What is
an ARM?
An ARM is a mortgage that adjusts with the marketplace. The initial interest rate of an
ARM will often be lower than that of most fixed rate loans. Initial rates for ARMs can be
as much as three percentage points lower than a 30 year fixed rate mortgage. Then, as the
country's economy and national interest rates fluctuate, your ARM's interest rate will
fluctuate with it.
How often do ARMs fluctuate?
Different ARMs are adjusted at different time intervals. Some are adjusted monthly, some
quarterly, and still others are adjusted annually, starting on the date you officially
borrowed the money. That's why it is so important to really discuss your particular needs
with your knowledgeable loan officer. They can help you determine which loan is right for
you.
Are there limits to how much an ARM can be adjusted?
Yes! When choosing an ARM it's important to pay attention to the adjustment caps. There
will be a specific cap to the amount a loan can fluctuate annually and also to how much
your interest rate can increase over the life of the loan..
Can I switch my ARM to a fixed rate mortgage later?
Some ARMs are Convertible ARMs. This means that they can be converted to a fixed rate
loan. There is often a large window of time in which you can convert your loan. For
instance, your ARM may be convertible between the 13th and the 60th week of your loan.
There is usually a small onetime fee for converting your loan. However, if you think
interest rates are going to go up in the future it may be worth it to you to discuss this
feature with your loan officer.
What is a Combination ARM?
A Combination ARM combines an ARM with a fixed rate mortgage. Initially, you would receive
a special fixed rate that is lower than the prevailing 30-year fixed rate. This discounted
fixed rate lasts for the first several years. Then the loan converts to an adjustable
rate. An example of a Combination ARM is a 7/1 ARM which gives you the lower fixed rate
for the first seven years, after which it converts to an ARM. Other common ARMs are 3/1,
5/1 and 10/1. The longer the fixed-rate period, the higher the initial fixed interest
rate.
What about FHA ARMs?
The Federal Housing Administration offers ARMs which are often less risky because their
interest rate cannot increase more than 1% per year. Furthermore, the most the interest
rate can increase over the life of the loan is five percentage points.
What are the advantages of an ARM?
An ARM can provide homebuyers with an affordable, low monthly payment and, in many cases,
buyers are able to buy a more expensive home. ARMs also allow many first-time home buyers
the ability to buy a home with fewer hassles than a fixed-rate mortgage. You may also
benefit from an ARM if you plan to move in a few years since your initial interest rate
will probably be lower. |
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