An adjustable rate mortgage is a type of mortgage loan with an interest rate that is subject to change over the term of the loan. The interest rate varies according to an economic index described in your loan agreement, and payments may increase or decrease over time. An adjustable rate mortgage is also known as a “variable rate mortgage” or a “floating rate mortgage.”
Reckless lending practices for adjustable rate mortgages (ARM) has given these home loans a bad name in the real estate market. Consumers purchased the loans ignoring that the interest rate was only for a fixed time. The mortgage interest rate locks at the current rate when an adjustable rate mortgage’s term is over.
The initial rate and payment of an ARM loan is usually lower than a fixed-rate mortgage. However, this is only for a limited amount of time. Adjustable rate mortgages typically last 3, 5, or 7 years before the loan’s interest rate finalizes, becoming a normal mortgage. Most ARM interest rates go up or down each year on the anniversary of the loan, but the loan contract should stipulate a yearly cap on the maximum amount of interest rate increase. It’s important to ask the lender what the annual percentage rate (APR) is on the ARM loan. A higher APR means that your rate and payments are likely to be higher when the loan adjusts.
Here is where borrowers get into trouble with an adjustable rate mortgage: they can only afford the house payment because the interest rate is so low. Remember, if the interest rate goes up, so does the house payment. An unscrupulous loan officer will over-emphasize the lower house payment with an ARM.
Due to the Truth in Lending Act (1968), home buyers are required to receive the full re-payment schedule before signing any loan documents. It is the home buyer’s responsibility to consider if he or she can afford the house payment if interest rates rise. Approval for a loan never guarantees a home buyer an affordable house payment.
An adjustable rate mortgage is a slight gamble. In real estate markets where the interest rates are falling over time, an ARM makes sense. At the end of the adjustable rate period, the borrower could lock in a lower interest rate than the conventional loans interest rate at the time of the home purchase. This is essentially a free refinance in the borrower’s favor. If interest rates are going up, the borrower will receive a higher interest rate than what was available on the day of closing.
Index Rate: An index rate for an ARM loan consists of two parts: the index and the margin. The index is a measure of interest rates and the margin is the percentage points that the lender adds to the interest rate.
Interest Rate Caps: The amount that your interest rate can increase.
The following are types of ARMs that Meridian Mortgage offers.
If you are considering an ARM home loan, here are some questions you may want to ask yourself.
To qualify for an ARM, a borrower has to contact a lender that offers ARM home loans. Just like other home loans, the borrowers credit score, employment history, monthly income, monthly debts and credit history will be checked.
Contact Meridian Mortgage if you would like to apply for an ARM loan.
For more information on applying for an ARM loan, contact Meridian Mortgage at 317-968-9500 or contact us online.
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Endeavor Capital, LLC and its DBA's are not acting on behalf of or at the direction of HUD/FA or the Federal government.
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