Mortgage companies, like Maryland’s WEI Mortgage Corporation, offer their clients a variety of loans, including adjustable-rate mortgages (ARMs). With an adjustable-rate mortgage, the interest rate will be tied to a market index rate and therefore will fluctuate periodically. ARMs can help borrowers lower the initial payments, however, these types of loans require the borrower to assume the risk of interest rate changes in the future. Therefore, ARMs are routinely used by borrowers who do not plan on living in the home for a long period of time.
The interest rate on an ARM loan is adjusted periodically, often on a yearly basis. When looking at an ARM loan, the first figure in the loan term describes the initial period of the loan, during which the borrower’s interest rate will stay the same. The second number represents the adjustment period, shown most frequently as an annual number.
For example, in a 5/1 ARM, the initial interest rate will stay constant for five years, and then after those five years are up, the rate can be adjusted annually. The change in the interest rate can be based on a few different factors, depending on the loan. The interest rate will always be based on some sort of index.
Some of the most common indexes include the weekly average yield on U.S. Treasury securities adjusted to constant maturity of one-year and the London Interbank Offered Rate (“LIBOR”), which represents the average interbank offered rates for one-year U.S. dollar-denominated deposits in the London market. ARM loans also often come with a rate cap to shield the borrower from extreme changes in the interest rate.
The interest rate cap of an ARM loan may either be an annual cap, preventing the interest rate from fluctuating too much over the course of a year, or a lifetime loan cap, which is the maximum amount the interest rate may rise above the initial rate over the lifetime of the loan. ARMs can be beneficial to borrowers, but with the added risk of interest-rate changes, can be more confusing as well.
Do not hesitate to ask many questions to your lender about ARMs in order to help understand all options and terms for home loans available to you. For more information on ARMs or other loan products, please visit http://www.weicorp.com.