Adjustable Rate Mortgage Interest Rates Are Lower Than Fixed Rate Mortgages

This BLOG On Adjustable Rate Mortgage Was UPDATED On July 6, 2017

Let us help figure out what is best! And if an ARM, Adjustable Rate Mortgage  is what is needed, please read on.

Adjustable Rate Mortgage

  • Most residential mortgage programs are 15 year fixed rate mortgages or 30 year fixed rate mortgages.
  • The most common mortgage loan program for FHA mortgages and Conventional mortgages are 15 year fixed rate mortgages and 30 year fixed rate mortgages. 
  • However, most portfolio loan mortgages are adjustable rate mortgages.

So what are Adjustable Rate Mortgages?

Adjustable rate mortgages are mortgage loans that are fixed for a certain period and then it adjusts every year after the fixed rate period for the term of the loan.

  • For example, on a 7/1 ARM (adjustable rate mortgage), the mortgage loan is set at a fixed rate for the first 7 years.
  • Then on the 8th year it adjusts and every year after until the term of the loan.
  • As an example, all condotel mortgage loan programs I have to offer my condo hotel mortgage loan borrowers and non warrantable mortgage loan borrowers are only adjustable rate mortgages. 
  • The most adjustable rate mortgages 30 year term are the 7/1 ARM, 5/1 ARM, and 3/1 ARM.
  • With these adjustable rate mortgages, the lender sets a starter rate.

How Adjustable Rate Mortgage Works

Let’s take the starter mortgage interest rate of 5.25%.

  • If we use the 7/1 ARM, the first 7 years, the mortgage interest starter rate will be 5.25%.  
  • The interest rate cannot go lower or higher than the 5.25% starter rate for the first 7 years. 
  • The principal and interest is calculated on a 30 year amortized schedule.
  • On the eight year and every year after that, it adjusts. 
  • The adjustment is based on the index and a fixed margin. 
  • The margin always remains constant throughout the term of the mortgage loan. 
  • The index will be based on which index the mortgage lender goes by and will be disclosed prior to closing the loan. 
  • On Condotel mortgage loans and non warrantable condo mortgage loans, lenders use the Cost Maturity Treasury index, also known as the CMT.  
  • Other popular and common index mortgage lenders use include the LIBOR and COFI.

Index On Adjustable Rate Mortgages

So if the Cost Maturity Treasury index is at 2.5 and the margin is at 3, the new rate on the 8th year will be set at 5.5%.

  • Say on the 9th year the Cost Maturity Treasury index is at 2. 
  • The new mortgage rate on the 9th year will be the 2 Cost of Maturity Treasury index plus the 3 margin for a new mortgage rate of 5%. 
  • The 5% new 9th year mortgage rate is lower than the initial starter rate of 5.25%. 
  • Unfortunately, most lenders have a clause on the mortgage that the adjustment rate on adjustable rate mortgages cannot be lower than the start rate. 
  • In this case, the 5% new rate would be lower than the 5.25% starter rate so the interest rate on your 9th year will be 5.25%.

Jumbo Mortgages And Adjustable Rate Mortgages

A large percentage of Jumbo Mortgage Loans, especially super jumbo mortgage loans, are adjustable rate mortgages.

  •  Most super jumbo mortgage loans, jumbo loans of $3 million and higher, are adjustable rate mortgages.

If you have any questions on adjustable rate mortgages, please contact us at 1-800-900-8569 or email us at gcho@gustancho.com.

2017 Mortgage Blog Update

This mortgage blog on adjustable rate mortgages was last updated on July 6, 2017

Gustan Cho NMLS ID 873293
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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