Adjustable Rate Mortgages

Adjustable rate mortgages (also known as "variable rate mortgages" and "ARM loans") are mortgages were the mortgage rate will adjust at various intervals. Adjustable rate mortgages will have a lower mortgage rate than fix rate mortgages. Adjustable rate mortgages have built in rate adjustment caps at each adjustment.

Adjustable Rate Mortgages - How ARM Loans Work

Adjustable rate mortgages use a mathematical equation to determine the mortgage rate adjustments. Below is a adjustable rate mortgage equation:

• Index + Margin = Mortgage Rate  -  ( Example: 3% + 2% = 5% mortgage rate )

Index is the variable aspect of the equation. It will be based on one of the most common adjustable rate mortgage indexes: 11th COFI, 6 Month LIBOR, Prime Rate or the 1 Year Treasury.

Margin is the constant of the equation. This is the spread the mortgage lenders charge above or below the index on adjustable rate mortgages. The typical adjustable rate mortgage margins are anywhere from -.5% to +5.0%. The lower the margin the better the loan.

Adjustment period will determine when Adjustable rate mortgages will adjustable mortgage rates. The adjustment dates are usually one of the following: monthly, every 6 months or annually.

Adjustment Caps are set to determine the maximum an adjustable rate mortgage can adjustment period. There is two types of adjustment caps: Adjustment Caps and Lifetime Cap of the adjustable rate mortgage.

Adjustment Cap - this is the maximum amount the adjustable rate mortgage can adjust at each adjustment date (i.e. monthly, 6 months or annually).

Lifetime Cap - this is the maximum amount the mortgage rate can go up over the entire life of the adjustable rate mortgage.

Adjustable Rate Mortgage Benefits

Adjustable rate mortgages can benefit you when mortgage refinancing because of the lower mortgage rates of the the adjustable rate mortgage. Also, as time progresses the amount of mortgage interest and monthly payments can decrease because the mortgage rate and mortgage payment will be calculated on the new adjustable rate mortgage balance.

An adjustable rate mortgage is usually used if you intend on retaining the real estate for a shorter amount of time or if you plan to send additional principal payments towards the adjustable rate mortgages.

Adjustable Rate Mortgage Loan Terms

Adjustable rate mortgages are available with all types of mortgage terms such as:

• Jumbo adjustable rate mortgages for loan amounts over $333,700

• Bad credit adjustable rate mortgages

• Hybrid adjustable rate mortgages: 2/28, 3/27, 5/25, 7/23 and 10/5 ARM loans

• FHA adjustable rate mortgages

• VA adjustable rate mortgages (3/1 ARM loans only)

• No Doc / Stated Income adjustable rate mortgages

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