Nations Choice Mortgage Adjustable Rate Mortgage Options

Adjustable rate mortgages or ARMs are very different from mortgages that are fixed rate. For one thing, the interest rate and the monthly amortizations change along with market interest rate fluctuations. Most ARMs have an initial period where the interest rate does not change akin to a fixed rate mortgage. However, as this period expires, the interest change then changes at certain preset intervals.

An adjustable rate mortgage or ARM is considered as riskier than a fixed rate mortgage because the monthly payments changes significantly. As an exchange for taking such a risk, borrowers are rewarded with a rate that is significantly below the market rates for 30-year fixed rate mortgages initially. The higher the frequency of rate adjustments throughout the mortgage’s term, the lower the initial rate is.

With adjustable rate mortgages, the new rates, after the loan adjusts, will by typically below the rates that are offered to new borrowers of 30 year fixed rate loan programs. Clearly, it is best to have an adjustable rate mortgage when interest rates are expected to remain the same or fall as it is possible that borrowers may end up paying an adjustable rate mortgage than that for a 30 year fixed rate mortgage.

Even though an adjustable rate mortgage is riskier than a fixed rate mortgage, the adjustable rate mortgage can be of benefit to borrowers if they have certain needs or are in certain situations.

Features of an Adjustable Rate Mortgage

An adjustable rate mortgage has two major features:
  • Index - refers to the index that the interest rate of the loan will be tied to once the fixed-rate period expires. The most common indices are the US Treasury Index, the LIBOR Index and the COFI or the 11th District Cost of Funds Index. The Treasury Index is tied to the US treasury rate and varies along with any increase of decrease as made by the Fed. LIBOR Index refers to the London International Overnight Bank Rate which varies as rates change in Europe and the UK. COFI is also referred to as the 11th District Cost of Funds rate which is the most volatile of all the indices.
  • Margin - refers to the amount above that of the Index which will determine the rate of interest that will be paid when the fixed rate period of the mortgage expires and the adjustment period starts. For example, a 5 percent margin would mean that the new interest rate will be 5 percent above the current index rate.
Once the initial fixed rate period has expired, a new interest rate is calculated. This is done by adding a margin to the index. The margin will be disclosed at the time of the mortgage loan application and as the index figure fluctuates, the interest rate gets adjusted accordingly.

The increase or decrease of the rate of interest will be limited by a cap structure which gives protection from large swings of interest rates. Caps come in two types: there is the annual cap and life-of-the-loan. An annual cap restricts the amount that the interest rate can change in a given year. The life-of-the-loan ceiling limits the minimum and maximum interest rate that can be paid for the life of the mortgage.

Benefits of an Adjustable Rate Mortgage

An adjustable rate mortgage has two major benefits:
  • Can provide a short-term boost to finances – Having a mortgage that allows for an initial fixed rate period can give homeowners a chance to free up some cash during the initial term of the loan.
  • An adjustable rate mortgage can allow homeowners to qualify for "more house" – Getting an adjustable rate mortgage may allow homeowners to qualify for bigger loan amounts and this means being able to find a more valuable property. There are numerous homeowners with very large mortgages who get one-year adjustable rate mortgages and refinance them annually. The low rate enables them to purchase a more expensive home while paying the lowest mortgage payments possible. The only disadvantage is the costs that are associated with refinancing.
  • An adjustable rate mortgage could be very useful depending on future plans – If the homeowner knows that they are only going to stay in a home for a short time, let us say for about a year to ten years, then there are enhanced benefits of an adjustable rate mortgage. The homeowner can enjoy the lower interest and lower payments during the initial period with minimal risk.

What Affects the Adjustment

An adjustment refers to the amount of rate change. The adjustment rate is determined by a formula that is based on an index; the most commonly used index being the 1-year United States Treasury Bill.

All ARMs have a lifetime rate cap or rate ceiling that limits the amount that the interest rate of the loan can go up over the mortgage’s term. A fairly large number of adjustable rate mortgages have a periodic rate ceiling or cap that limits the amount that the interest rate can go up after each adjustment.

Types of Adjustable Rate Mortgages

An adjustable rate mortgage has two major benefits:
  • Hybrid Adjustable Rate Mortgage – A hybrid adjustable rate mortgage is a cross between an ARM and a fixed rate mortgage. The initial period of the mortgage features as a fixed interest rate which is followed an adjustable rate for the remainder of the mortgage term.
  • Option Adjustable Rate Mortgage – An option adjustable rate mortgage gives a homeowner a choice of amortization amounts between paying only the interest (interest-only payments) or a minimum payment that is lower than the interest only payment amount. The rate of interest on an option adjustable rate mortgage adjusts monthly and payment is on an annual basis. There is a possibility of negative amortization which can happen when the monthly payments are not able to cover the interest on the mortgage resulting in an increase of the mortgage balance instead of a decrease.
  • Interest-only Adjustable Rate Mortgage – An interest-only ARM is a type that allows a homeowner to make only the interest payments on the loan during the span of the interest only period. The length of this period varies and after the interest only period the mortgage must then amortize so that it can be paid off at the end of its term which means that the monthly payments increase after the interest only period expires.
Whether you are looking to buy your very first home or your second home, it is always important to find the right mortgage and that is not always easy. The process can be time-consuming and stressful especially if you are trying to decide what type of mortgage is right for you and your family. At Nations Choice Mortgage, there is a dedicated and highly-trained team of mortgage professionals who are always ready to answer any questions that you may have regarding which type of mortgage is good for you and which type would be most affordable. There is an option for you to get an instant quote which will give you an idea as to what the best offer is.

Nations Choice Mortgage will help you find the mortgage that is right for you. We at Nations Choice understand that trying to choose which mortgage is the most affordable for you is probably one of the biggest decisions that you will ever make. Our team will ensure that the process will be as stress-free and as easy as possible. This is because we know what your dream of owning a home means to you.

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When you are truly ready to make your dream to sleep in your own home a reality, Nations Choice Mortgage can help you make sure you enjoy all the benefits of getting a home loan that truly fits your needs.

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