ARM: Adjustable Rate Mortgages

ARM stands for adjustable rate mortgages. Adjustable rate mortgages are 30 year mortgage loans with an initial fixed rate period and the mortgage rates adjusts every year after the initial rate period every year for the remaining 30 years. There are pros and cons with adjustable rate mortgages. With fixed rate mortgages, the mortgage rate is fixed for the 30 year period and once the homeowner pays the principal and interest, which cannot change for the 30 year period, the loan is paid off.  With adjustable rate mortgages, even if the mortgage rates changes or may change or not change depending on the index, the mortgage loan gets paid off in 30 years. The difference with adjustable rate mortgages is that the principal and interest may change year after year after the initial fixed rate period. Homeowners thinking of refinancing to ARM instead of a 30 year fixed rate mortgage loan, need to think about how long they intend on staying in their home. Again, there are pros and cons in refinancing to ARM versus a 30 year fixed rate mortgage loan.

Basics Of Adjustable Rate Mortgages

The way adjustable rate mortgages work is that there is an initial fixed rate period and after the fixed rate period expires, the mortgage rates can adjust every year for the balance of the 30 years. The way adjustable rate mortgages are calculated is by adding the index to a fixed margin where it yields the mortgage rate. The margin is a fixed rate and will remain constant for the 30 year mortgage loan term. The index changes. Mortgage lenders choose which index they will base the mortgage loan on.  For example, on a 5/1 ARM, the mortgage loan borrower will get a fixed rate for the first 5 years of the term of the mortgage loan and on the sixth year and thereafter, the mortgage rates will adjust depending on the index.

Benefits Of Refinancing To ARM

The right hand rule in refinancing to ARM instead of a 30 year fixed rate mortgage loan is if you do not intend in living in your home for a long time.  Adjustable rate mortgage loans have much lower mortgage rates than 30 year fixed rate mortgage loans. Many home buyers who purchase a starter home and do not intend in living in their new home purchase for more than five to ten years may consider financing their mortgage loan to an adjustable rate mortgage loan. Homeowners who have a higher interest rate and when rates drop may want refinancing to ARM if they do not intend in living in their home for more than five to ten years.  Adjustable Rate Mortgages are normally more than 0.50% less than 30 year fixed rate mortgage rates.

Those homeowners who are looking for the lowest principal and interest monthly payments may want to consider refinancing to ARM instead of a standard 30 year fixed rate mortgage due to the lower mortgage rates on adjustable rate mortgages. Lower mortgage rates yields lower principal and interest payments.

Mortgage rates are at a historical low still and there is talk and rumors that the Federal Reserve Board is going to be raising interest rates. If you are a homeowner and need an analysis in refinancing your current home loan, please contact me at 262-716-8151 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, holidays, and weekends included to answer all of your mortgage refinance questions. We can do an analysis on which mortgage loan program is best for you, whether it is refinancing to ARM or refinancing your home loan to a fixed rate mortgage loan.

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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