Adjustable Rate Mortgage (ARM)

In a high interest rate market, Adjustable Rate Mortgages (ARMs) offer homeowners the ability to purchase a home with a lower initial interest rate and, therefore, a lower initial monthly payment. An ARM maybe a good option to consider if you plan to own your home for only a few years, you expect an increase in future earnings, or the prevailing interest rate for a fixed mortgage is too high.

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What Is An Adjustable Rate Mortgage?

An adjustable rate mortgage, also called an ARM, is a mortgage with an interest rate that is tied to an economic index. The borrower's interest rate is adjusted as the index changes. Some common indexes are the one-year constant-maturity Treasury (CMT) securities and the Cost of Funds Index (COFI), though some lenders use their own cost of funds as an index. The loan will identify the index, stipulate the adjustment period (monthly, every six months, annually, etc.), and identify the fixed margin, which is the percentage above the chosen index that represents the lender's cost of the loan plus profit. The index rate plus the margin is called the fully indexed rate, also known as the fully indexed ARM rate (FIAR), and represents the total interest rate charged to the borrower. In addition, an ARM has a cap rate, which is the ceiling (cap) on the interest rate. ARMs are required to have overall caps or lifetime caps to limit the interest rate increase over the life of the loan, but are not required to have periodic caps that limits the interest rate increase between adjustment periods.

An adjustable rate mortgage may be a great option for you depending on your situation, but it is important to talk to a knowledgeable Mortgage Loan Originator about your specific scenario so they can advise you accordingly.