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Adjustable Rate Mortgages - The Basics

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.

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Ken and Bev Williamson
RE/MAX Mesa Verde Realty
Cortez, CO 81321
Phone (Bev): 970-759-0183
Phone (Ken); 970-759-4814
Fax: 970-565-2088
Email: realestatecortez@gmail.com
beverlyw@remax.net
RE/MAX Mesa Verde Realty

Thank you for visiting today. If this is your first visit, take your time and look around. I have plenty of information and resources available to you. If you are a return visitor, thank you. I would love to hear from you and tell you how I can serve all your real estate needs.  Cortez, CO Real Estate Homes For Sale and surrounding areas in the Southwest. RE/MAX Mesa Verde Realty

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A+++++ You can expect only the best from Ken! He went the extra mile for this sale. I moved out of town and felt at ease that he was taking care of things for me! Gerry
Ken spent hours helping us fond the home that was right for us. He knows real estate but is also caring, and very patient. Jim and Puff
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agent photo

Ken and Bev Williamson
RE/MAX Mesa Verde Realty
Cortez, CO 81321
Phone (Bev): 970-759-0183
Phone (Ken); 970-759-4814
Fax: 970-565-2088
Email: realestatecortez@gmail.com
beverlyw@remax.net
RE/MAX Mesa Verde Realty

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