What is an Adjustable Rate Mortgage or ARM Loan

What is an Adjustable Rate Mortgage or ARM Loan?

and go over all of the pros and cons to an arm loan for your particular situation for some folks an armed loan may be great because let’s say they’re going to sell within a short period of time in that situation that an arm loan might be a good fit here’s another pro or you want to make sure of and that you’re confident that you can afford the increases in your monthly payment even to the maximum amount if the rate should adjust because the rate is going to adjust you want to make sure that you understand that and that you can afford the loan even at the maximum rate okay how do they determine the interest rate on an adjustable rate mortgage now there’s two parts on the interest rate there is the index and the margin okay the index is a measure of interest rates generally reflects trends in the overall economy and different lenders use different indexes for their arm programs for example some lenders are going to use the libor index libor stands for london interbank offered rate or they might use the so far which is the secured overnight financing rate so you want to ask your lender what index your arm loan is based on okay the second part of the interest rate is going to be the margin the margin is an extra percentage

that the lender adds to the index now you can shop around so you can find the lowest combination of the index plus the margin okay for example let’s say the so far index was at point five percent and the margin was three and a half percent well then your total interest rate would be four percent now how high can it go you want to pay attention to this because there’s what they call caps within an adjustable rate mortgage for example you might hear like a two one five cap well what do those numbers actually mean okay the first number is the initial adjustment after the fixed period ends so let’s say you’re at a ten one arm at four percent and let’s just say the index goes crazy well there’s a maximum cap on that first initial adjustment that it could change to so for example let’s say you’re at four percent and then that it go the index goes crazy well then your that first initial adjustment would be at six percent now the second number is for the maximum adjustment every year after the initial adjustment

so like the second number with being a one would mean that after that first adjustment then it could only go to seven percent or lower to five percent and the final number is the lifetime cap the last number being five that means the highest that the interest rate could be is it would be at nine percent so you want to make sure that you understand exactly how those your interest rate could cap and you want to make sure that you calculate your payment and can you afford that payment if it goes to the lifetime cap want to make sure you understand exactly what you’re getting into with an arm loan it’s okay to call time out and ask questions and here’s the other thing too your lender and your realtor is going to be long gone after you start making those payments so you want to make sure that if you’re getting into an arm loan that a you can afford it because if you get into the wrong type of arm loan it could be a disaster so you want to make sure you’re working with a local trusted loan advisor

The pros and cons of an adjustable rate mortgage also known as an arm and we’re gonna get started right now hi my name is david matney with nebraska realty i’m a local realtor here in omaha nebraska now let’s jump into today’s topic now what is an adjustable rate mortgage or an arm now many people are familiar with a fixed rate mortgage now with a fixed rate mortgage your interest rate is fixed for the entire length of the mortgage now in the past several years with fixed rate mortgages being so low you didn’t really see a lot of arms because people could lock in a low fixed rate mortgage at three percent for 30 years okay now that interest rates have increased you’re starting to see more and more arm loans being offered now an arm loan is where the interest rate can change or adjust throughout the period of the loan so why would anyone want to do an arm loan now here’s the thing with arm loans they’re kind of like ice cream they come in all different flavors and some common arm loans

are five one seven one ten one you might see a five six or a seven six or a ten six now what do these numbers mean now the first number tells you the length of time that your initial interest rate is fixed for example in our example of a ten one arm at four percent for the first ten years of the life of the loan your interest rate is fixed at four percent the second number tells you how often the rate changes after that so every year following that your interest rate may adjust whether it be up or down okay what are some of the pros of an arm loan the first pro is that your initial interest rate may be lower than a fixed rate mortgage okay the second pro is that the buyer may be able to qualify for more home so the buyer may have more purchasing power with an arm loan okay now this is another pro but you got to be very careful with this now if you think or believe that rates will come down you may be able to refinance at a later time into a fixed rate mortgage at a lower rate but here’s the key thing and that is if and then the other key thing that you want to do is if you’re doing an arm loan is you want to make sure that you ask the lender if there’s any prepayment penalties okay and this is another big pro with an arm loan let’s say you’re doing a 10-1 arm and you plan on only being in the home for let’s say seven years and then you’re moving out of state well

if you do a 10-1 arm at four percent then that’s going to allow you to save money because you plan on moving within seven years before that initial interest rate changes so that’s one of the pros with an adjustable rate mortgage okay what are some of the cons of an arm loan okay number one and this is big there’s more risk involved and it’s very important that you know and understand the risk involved with an adjustable rate mortgage okay the second con of an adjustable rate mortgage is you don’t know what your future payment is going to be this is another con with an adjustable rate mortgage what if in the future your home decreases in value and then you’re not able to refinance the home or let’s say your financial situation changes and you can’t qualify in order to refinance to a lower rate there is a significant risk involved with that okay the fourth con is let’s say the arm loan adjusts and you can’t afford the new payment then you could lose your home to foreclosure if you’re gonna do an arm loan it’s important that you have a frank discussion with your trusted mortgage advisor

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