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Who needs another ARM? Most ARMs are 30-year programs. They have one fixed rate for a set term, then the rate adjusts. A rate cap protects you from ever getting a high rate. You’ll know the maximum rate before you close on the loan! The initial interest rate is generally very low (like, 3-4%!), but the ARM programs require that you do your research well! Working with a knowledgeable broker will help you make the decision about which ARM program is right for you. Understanding the numbers ARMs are described with two numbers, such as a “3/1 ARM” or a “10/1 ARM.” The first number represents the number of years that you will get the low fixed rate on your ARM. After those years are over, your interest rate will be adjusted on a periodic basis, which is the second number in the program. So, a “3/1 ARM” would have a set interest rate for 3 years, and then adjust every 1-year. Likewise, a “10/1 ARM” would have a set interest rate for 10 years, which would then adjust every year after that. How ARM mortgage rates are determined The rates for ARMs are lower than the rates for conventional mortgages. These are shorter-term programs, which means a bit less risk for the lender and the rates are determined in a different way. ARMs are based or indexed to another banking rate, frequently the 1 Year Treasury Index or the LIBOR, which is The London Interbank Offered Rate (similar to our fed funds rate). After the initial term of the ARM, the rate is adjusted regularly, based on the index rate. This does not mean that your ARM interest rate will equal the index rate. The lender will build in a margin on top of the index rate to determine your final rate. You can find graphs of the particular index rate of the ARM that you’re looking at, which will give you an idea of how it moves in relationship with the economy. Rate protection Now, if all this adjustment business seems scarily open-ended, have no fear. There are protections built in to keep your rate from skyrocketing. These protections are called “caps” and there are usually two of them. The periodic cap will limit the interest-rate increase from one adjustment period to the next. The overall cap will limit the interest rate increase over the life of the loan. By law, virtually all ARMs must have an overall cap, which will protect you from any unexpected surprises. Choosing an ARM So, is an ARM right for you? First, you must consider how long you plan to remain in the property. The average homeowner stays in a home for 7 years. This means a 7/1 or a 10/1 ARM is a great option. Some people might opt for the low rates of a 3/1, knowing that they’ll refinance before the term is up. Qualifying for an ARM The most aggressive have more stringent qualifying conditions, such as lower LTVs and DTIs. (If those abbreviations mean nothing to you, call and we’ll explain!) There are programs out there for borrowers with lower scores, though they may carry a higher margin. It’s also helpful to be able to forecast your household income, and/or have a good sense of job security. You’ll want to ensure that the adjusted payments after the initial term are something that you can handle if you stay in the ARM program. Remember, if you know the periodic and overall cap, you can estimate the highest rate that you could ever have, and it’s frequently not that much more than the fixed rate programs. We’re here to help. Most importantly, when you’re shopping for ARMs, it’s important you understand the terms of the program. At Bauer Mortgage Group, we strive to educate you and ensure that you’re getting the best program. Please contact us for a detailed quote and more information about our adjustable rate programs. Shake a leg and get an ARM! Until next week, Your friends at Bauer Mortgage Group. Email us to learn more. Seacoast Bauer Mortgage Group |
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