Adjustable Rate Mortgages (ARMs)

Sometimes it is more important for you to have a lower initial rate, resulting in a lower payment, so that you will be able to qualify for the home you have chosen. Perhaps you plan to move in a few years and are not concerned about possible interest rate increases. Maybe you are confident that your income will increase enough in the coming years to compensate for periodic increases in your interest rate, and subsequently larger mortgage payments that accompany an Adjustable Rate Mortgage Loan (ARM).

If the scenarios described above are similar to your situation, you may wish to consider the substantial savings available to you with an Adjustable Rate Mortgage (ARM). It’s important to note that you have the option of refinancing your loan at the completion of the fixed period, to a new ARM loan or a longer fixed rate term.

With an ARM, your interest rate is fixed for a given period of time, depending on the term you have chosen, typically 1, 3, 5 or 7 years. ARM loan rates are typically lower than the longer fixed rate terms described in this section. Your interest rate will increase each year after completion of the fixed period. These predetermined adjustments define the amount of interest rate increase you may incur during each adjustment period, and also the maximum interest rate you could be charged over the life of the loan.

One cap limits the amount that your interest rate can go up during each adjustment period. For example, an ARM that adjusts annually may cap the yearly interest rate increases at 2 percent, meaning the adjusted interest rate can never be more than 2 percent higher than the year before.

The other cap sets the limit on the total amount of interest adjustments over the life of your loan. An ARM that has a lifetime rate cap of 6 percent, means that the highest adjusted interest rate you will ever be required to pay is no more than 6 percent above the original rate. Using this example, an ARM with an introductory rate of 5 percent and a lifetime cap of 6 percent, means that the highest interest rate you will ever pay would be 11 percent.

You will receive ample notice regarding these adjustments to your rate, allowing you to decide whether to continue at the present rate or refinance your loan to a lower rate.

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