Ideal for short-term borrowers interested in the lowest possible interest rate.
A variable or adjustable rate mortgage (ARM) is a mortgage that has a fixed interest rate for a short period of time, often 3, 5 or 7 years, then the interest rate may adjust up or down through the remaining term of the loan based on certain conditions. The interest rate fluctuates periodically based upon the predetermined index, margin and periodic caps.
The benchmark determined as loan application upon which an adjustable rate mortgage will fluctuate. Common indexes include, 1-Year Constant Maturity Treasury (CMT), 12-Month Treasury Average (MTA), 6-Month London Inter Bank Offering Rate (LIBOR) and 11th District Cost of Funds Index (COFI).
A fixed percentage added to the index to compute the newly adjusted interest rate. The resulting rate is typically rounded to the nearest one-eighth of a percent.
Periodic Adjustment Caps
Most adjustable rate mortgages have initial, periodic and lifetime interest rate caps. These caps determine the maximum interest rate adjustments either up or down during the initial interest rate adjustment, each periodic interest rate adjustment thereafter and the maximum lifetime interest rate adjustment over the life of the loan.
Features of This Loan
- Lower initial interest rate and monthly payments than a fixed rate loan
- Variety of fixed-period options, up to 10 years
- Various rate cap options
For Borrowers With the Following Consideration Points
- Have varying or seasonal income
- Planning to relocate or pay off loan within or shortly after fixed rate period
- Willing to accept the potential of future interest rate changes