Adjustable Rate Mortgage or ARM
An Adjustable Rate Mortgage, or ARM, is a mortgage loan with an interest rate that adjusts periodically according to the financial index it is based on plus a margin. The financial index is tied to our economic climate in some way or another. The margin stays the same, the index may change, and therefore the rate may change to the point of the index and margin added together. These rates can sometimes start as low as 1.2%. To limit the borrower’s risk, the Adjustable Rate Mortgage will usually have a payment or rate cap. A payment cap is a limit on the monthly payment. An interest cap is a limit on the amount the interest rate can increase. A periodic cap limits the amount the interest rate can change at the time of each periodic adjustment. A life cap restricts the amount the interest rate can increase over the entire life of the loan. These ARM programs range from ones that adjust monthly to ones that are fixed for 5, 7, or 10 years before adjusting. This is an extremely beneficial loan for the right borrower.