ARM Loans
Understanding Adjustable Rate Mortgages
They key point with an Adjustable Rate Mortgage is that at some point in time that rate you have will adjust. Sounds simple but many people forgot this and find themselves in a loan they need to get out of. Adjustable Rate Mortgages are short to medium term solutions for homebuyers or those looking to refinance their existing mortgage.
Most homeowners have either a 3 or 5 year fixed adjustable rate mortgage. This means after the 3rd or 5th year the rate on the loan will adjust higher. Some adjustable rate mortgages are fixed for a little as 1 month all the way up to 10 years depending on the program. The key to obtaining an adjustable rate mortgage program is deciding how long you will need the loan for. For example, if you plan on moving in 3-5 years, you’ll want a 5 year fixed mortgage. If you’re taking cash out and doing a remodel for the next year or two, then you might want to lock in the rate for 3 years.
When these rates adjust they will apply your margin (you always want to ask what your margin is) to what ever index the loan is based (Usually the LIBOR) and that will be your new rate. Most loans will only adjust a maximum each adjustment and have a ceiling for how high the rate can go.
Be prepared. Be prepared to refinance your mortgage after it adjusts or sell the property so you do not have to pay the higher interest rate. Ask questions and make sure your understand your loan prior to signing loan documents. Always ask these three questions:
1. How long is the loan fixed for and does that match my needs?
2. What is the margin the bank will apply to the loan after it adjusts?
3. What is the index the loan is based on?
Knowing the answers will make you better prepared when getting an adjustable rate mortgage.
Kevin O'Connor
Mortgage Consultant
www.koloans.com
800.550.5538
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