ADJUSTABLE RATE MORTGAGE / SELLER BUY DOWN
(ARM)

An Adjustable Rate Mortgage (ARM), also known as a variable-rate mortgage or floating-rate mortgage, is a type of home loan where the interest rate fluctuates over time based on changes in a specified financial index. Unlike a fixed-rate mortgage, where the interest rate remains constant for the entire loan term, an ARM offers an initial fixed-rate period followed by adjustable rate periods. This initial fixed-rate period is usually set at a lower rate than what you might find with a traditional fixed-rate mortgage.

Initial Fixed Period

The ARM begins with an initial fixed-rate period, typically ranging from one to ten years. During this period, the interest rate remains fixed and does not change. This means your monthly mortgage payments remain stable and predictable, providing a sense of security to borrowers.

Adjustment Period

After the initial fixed-rate period expires, the ARM enters the adjustment period, which is when the interest rate starts to change. The adjustment period is usually one year but can be as long as five years, depending on the terms of the loan.

Index and Margin

The interest rate on an ARM is tied to a specific financial index, such as the London Interbank Offered Rate (LIBOR) or the Constant Maturity Treasury (CMT) rate. The lender adds a margin to the index rate to determine the ARM's new interest rate. For example, if the index rate is 3% and the margin is 2%, the new ARM rate will be 5% when the adjustment occurs.

Caps

To protect borrowers from extreme fluctuations in interest rates, ARM loans typically have caps that limit how much the rate can adjust at each adjustment period and over the life of the loan. There are usually three types of caps:

・Initial Adjustment Cap: Limits the rate increase at the first adjustment after the initial fixed-rate period ends. b. 

・Periodic Adjustment Cap: Limits the rate increase or decrease at each subsequent adjustment period. c. Lifetime Cap: Sets the maximum interest rate that can be charged over the entire life of the loan.

Rate Adjustment

At each adjustment period, the ARM rate is recalculated based on the current index rate and the terms of the loan. The new rate will then be applied for the next period until the next adjustment occurs.
Payment Adjustment: When the interest rate adjusts, your monthly mortgage payment will change accordingly. If the rate increases, your payment will likely increase, and if the rate decreases, your payment will decrease as well.

Considerations

Adjustable Rate Mortgages are suitable for certain borrowers, such as those who plan to sell their home or refinance before the initial fixed-rate period ends. They may also be appropriate for individuals who expect their income to increase in the future and can handle potential payment fluctuations. However, they carry some risk, as rising interest rates could lead to higher monthly payments and financial strain for borrowers.

Before considering an ARM, it's essential to understand the terms and risks associated with the loan and to carefully evaluate your financial situation and long-term plans. Consulting with a qualified mortgage advisor can be helpful in making an informed decision that aligns with your financial goals.

Have questions? Give us a call! One of our mortgage specialists would be happy to answer all of your questions.

Fill out the questionnaire on this page to start a discussion about your mortgage needs today!