Many of us get turned away from hearing about ARM mortgage options for many different reasons.The most common question being asked is "What will my rate be once it adjusts?". There isn't a short easy answer and in many cases a written explanation is easiest.Throughout this guide you learn the functionality of an ARM Mortgage and on ways to hedge your risk exposure.
Every Adjustable Rate Mortgage has an index, margin, adjustment caps. The index and margin dictate the market connected to the adjustability of the rate. Also, the Margin is always a fixed number and the index bears all of the market adjustments. For example, the majority of ARM products currently being offered use the LIBOR index and this weeks pricing is at .74.The margin is fixed and dictated by the product, credit score, and Loan to Value. For example, a 7 yr ARM, 750+ credit score, and 10% down payment. The margin for this scenario is 2.65. By adding the margin and the index would make the anticipated first adjustment rate (85th month) to be 3.39. When advising current ARM applicants about a refinance opportunity I always evaluate their current margin and index rate. If the margin + indexes are lower than their current rate I will advise for them to let it adjust. I have experienced many cases in which the post adjustment rate mortgage payment has gone down!
Every ARM Mortgage has CAPS that limit the amount of adjustment. For example, an ARM with a 2/2/6 CAP tells us that the on the date of your first adjustment the loan could adjust by as much as 2% above the original rate. Every year after that it can adjust by as much as 2%, and the rate will never get more that 6% above the original start rate. When considering an ARM mortgage always ask your mortgage advisor to disclose the CAPS for your consideration.
The ARM Mortgage is gaining popularity. Aside from the attractive start rates, the ARM mortgage gives the flexibility to reinvest the savings back into your equity position. For those considering buying for the first time or upgrading into a luxury home an ARM mortgage can soften the burden of payment shock. Since 99.9% of all mortgages are closed end, a refinance opportunity will most likely present itself before the anticipated mature date. If the additional savings is applied on a consistent basis the opportunity will present itself sooner. Also, I suggest comparing the amortization schedules of a FIXED and ARM mortgage. This will clearly show how more principle is applied with the ARM. The majority of all core mortgage lending transactions are refinances. If you don't agree then consider how many times you've pondered about having the same payment and owing less.
On a personal note, the 7-year ARM is my favorite product for primary resident applicants. It gives plenty of time for savings, reinvestment, and equity building before refinancing. FHA, conventional, and Jumbo loans have this product available. Please contact me anytime for more information on ARM products or other loan programs.
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