Adjustable Rate Mortgage
An Adjustable Rate Mortgage (ARM) is a type of home loan with an interest rate that can change periodically. Typically, the initial interest rate is lower than that of a fixed-rate mortgage, but it can fluctuate based on market conditions. This means that the borrower's monthly payments may increase or decrease over time, depending on the terms of the loan.
4 Key excerpts on "Adjustable Rate Mortgage"
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What is an Adjustable Rate Mortgage (ARM)? Adjustable Rate Mortgages, also known by their acronym ARM’s, are those mortgages whose interest rates change from time to time. These changes commonly occur based on an index. As a result of changing interest rates, payments will rise and fall along with them. Adjustable Rate Mortgages involve a number of different elements. These include margins, indexes, discounts, negative amortization, caps on payments and rates, recalculating of your loan, and payment options. When considering an Adjustable Rate Mortgage, you should always understand both the most that your monthly payments might go up, as well as your ability to make these higher payments in the future. Initial payments and rates are important to understand with these ARM’s. They stay in effect for only certain time frames that run from merely a month to as long as five years or longer. With some of these ARM’s, these initial payments and rates will vary tremendously from those that are in effect later in the life of the loan. Your payments and rates can change significantly even when interest rates remain level. A way to determine how much this will vary on a particular ARM loan is to compare the annual percentage rate and the initial rate. Should this APR prove to be much greater than the initial rate, then likely the payments and rates will similarly turn out to be significantly greater when the loan adjusts. It is important to understand that the majority of Adjustable Rate Mortgages’ monthly payments and interest rates will vary by the month, the quarter, the year, the three year period, and the five year time frame. The time between these changes in rate is referred to as the adjustment period. Loans that feature one year periods are called one year ARM’s, as an example. These Adjustable Rate Mortgages’ interest rates are comprised of two portions of index and margin. The index actually follows interest rates themselves...
eBook - ePub- Michael C. Thomsett(Author)
- 2009(Publication Date)
- Wiley(Publisher)
...This low rate is called a teaser. Later, when the adjustable feature kicked in, or when the limited time of the ARM expired, higher rates went into effect and monthly payments rose by several hundred dollars. For those who got no-down-payment deals with very low adjustable rates, it was easy to walk away from the deal. People had no equity in the properties and no way to make monthly payments. So using ARMs meant lenders caused many of their own problems. adjustable-rate mortgage (ARM) a loan for which the future interest rate may change, with the change determined by an index of rates. The frequency and amount of change are limited by the mortgage contract. Several important features come with an adjustable-rate loan. The degree to which interest will change in the future is determined by changes in an index of interest rates. Several index measurements are published, and the one the lender will use is specified in the contract. For example, some lenders adjust their rates based on auction interest rates for U.S. government securities; others use the prime rate, the bank’s district rate, or a regional rate. The important point to remember is that the index is included in the original contract; the lender cannot change the index later on. As the borrower, you take the lower initial rate as a trade-off for protection against the possibility of higher rates in the future. In other words, the risk is that your interest rate will rise; the benefit is a lower initial cost. For some borrowers, this is an acceptable risk; for others, there is no choice. Some people have to go for the adjustable-rate loan because of the initially lower monthly payment involved. To qualify for a loan, your income is compared to the monthly payment level. If the payment exceeds a predetermined standard, the bank turns you down...
eBook - ePubFixed Income Securities
Concepts and Applications
- Sunil Kumar Parameswaran(Author)
- 2019(Publication Date)
- De Gruyter(Publisher)
...Thus the initial financial burden on the new homeowner is lower. If rates do not change much, or decline sharply, the borrower stands to benefit as compared to a party who has availed of a fixed rate mortgage. However, the flip side is that the interest rates may rise, and the borrower then has to pay higher periodic installments. The interest rate and consequently the monthly payment of an ARM resets periodically. The rate may change every month, quarter, year, or even longer periods. The time period between rate changes is called the adjustment period. For instance, an ARM may have an adjustment period of 12 months. That is, the rate is reset once per annum. Variations on the ARM Structure Let’s now discuss some alternatives to a simple ARM structure. Hybrid ARMs : An N/1 ARM is a hybrid of a fixed rate and a variable rate mortgage loan. The rate remains fixed for the first N years, after which the loan assumes the feature of an Adjustable Rate Mortgage. For instance, a 5/1 ARM means that the rate is fixed for the first five years. Thereafter the rate adjusts annually until the loan is paid off. A 30 mortgage loan may also be described as an n /30- n ARM, for instance a 4/26 ARM. This means that the rate remains fixed for the first four years, after which it becomes adjustable. Once the fixed rate period expires, the rate may be adjusted annually or at times even more frequently. Interest-only or I-O ARMs : In the case of such an ARM, the borrower pays only interest for the first few years. This reduces the cash flow burden on the borrower. At the end of the initial period, the monthly payments increase, even if interest rates do not change, because the entire principal has to be repaid over a truncated period. The interest rate may or may not adjust during the initial (I-O) period. The longer the duration of the I-O period, the higher the periodic payment is after it ends, because the loan has to be repaid during a shorter period...
eBook - ePubMoney and Banking
An International Text
- Robert Eyler(Author)
- 2009(Publication Date)
- Routledge(Publisher)
...Even if your mortgage is purchased by another bank on a secondary market, the terms and cost are the same to you. The main reason why fixed rate loans are attractive to consumers is that fixed payment. If you borrow $250,000 at six percent interest for 30 years, your monthly payment is approximately $1500 per month. That never changes for the entire 30 years. If inflation erodes the value of money such that one dollar buys a tenth in 25 years of what it buys today, you still pay $1500 a month (which in the scenario above means you pay the equivalent of $150 in monthly mortgage payments before any tax breaks). Variable rate mortgages allow banks to shift inflation risk onto borrowers, especially borrowers who are more risky or willing to take such a risk to gain access to credit. The interest rate and monthly payments react to new inflation information. Typically, variable rate mortgages have lower initial interest rates with respect to fixed rate mortgages. That initial rate may hold for a few years, and then allow the bank to change the rate upward if inflation conditions warrant the shift. The global financial crises beginning in 2007 were partially from homeowners experiencing higher interest rates as their monthly payments were reset for Adjustable Rate Mortgages. This forced some homeowners to sell due to higher risk of default and profit-taking, exacerbating a downturn in home prices already pressured by profit-taking from fixed-rate borrowers, tightening credit conditions, and cyclic movements downward in real estate. A loan’s characteristics (amount of loan, type of home, location of home, etc.), including the borrower’s credit and other financial characteristics (net wealth and current income typically), help the bank determine the loan’s interest rate...
