ARM Loans

Is an ARM Mortgage right for you?

An adjustable rate mortgage, which is abbreviated as ARM, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes. The rate adjustment period varies, the shorter the period, the lower the rate, the longer the period, the higher the rate.

Terms you need to know:

  • Index
    An index is a guide that lenders use to measure interest rate changes. Common indexes used by lenders include the activity of one, three, and five-year Treasury securities, but there are many others such as the L.I.B.O.R. or C.O.F.I.  Each A.R.M. program is linked to a specific index.
  • Margin
    The margin is the lender's profit margin, or “spread” between the index and the rate you pay. The margin is added to the index rate to determine your total interest rate.
  • Adjustment Period
    The adjustment period is the period between potential interest rate adjustments.
    You may see an ARM described with figures such as 1-1, 3-1, 5-1, 7-1 or 10-1. The first figure represents the initial period (usually in years) of the loan, during which the interest rate will stay the same.

    The second number is the adjustment period, showing how often adjustments can be made to the rate after the initial period has ended. The examples above are all ARMs with annual adjustments--meaning adjustments could happen every year, or be delayed as long as 10 years depending on the program you select.

Why should I consider an ARM if the payments could go up in the future?

The initial interest rate for an ARM loan in RI, MA, CT, NH, VT, and ME is lower than that of a fixed rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan, or, allow you to put some extra money aside for other budgetary considerations. A common reason to take an A.R.M. loan would be if you plan to sell the home within a few years, so a payment increase or rate adjustment is not a concern. Another reason to take an A.R.M. loan might be if you expect your income to increase. If so, the extra funds might cover the higher payments that result from rate increases. Some ARMs can be converted to a fixed-rate mortgage. However, conversion fees do generally apply.

ARM Indexes

While you can't dictate which index a lender uses, you can choose a loan and lender based on the index that will apply to the loan. You should research how each index used has performed in the past. Your goal is to find an ARM that is linked to an index that has remained fairly stable over the decades. When comparing lenders, consider both the index and the margin rate being offered.

Interest Rate Caps

Rate caps limit how much interest you can be charged. There are two types of interest rate caps associated with ARMs.

  • Periodic caps limit the amount your interest rate can increase from one adjustment period to the next. Not all ARMs have periodic rate caps.
  • Overall caps limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987.

Please feel free to call us at 866 HOME-310 to ask one of our Certified Mortgage Planners as many questions as it takes, to help you understand every aspect of how ARM loans work and if it makes sense for you.

We are licensed in RI, MA, CT, NH, VT, and ME.