ADJUSTABLE RATE MORTGAGE LOAN
An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down. Generally, the initial interest rate is lower than that of a comparable fixed-rate mortgage. After that period ends, interest rates — and your monthly payments — can go lower or higher.
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LOW INTEREST RATE LOW PAYMENTS
How Does an Adjustable-Rate Mortgage Work?
The initial rate and payments during the first few years can be significantly different from rates and payments later in the loan’s term. Before committing to an adjustable-rate mortgage, ask your lender for an annual percentage rate (APR). If this rate is higher than the initial rate, it is safe to assume that your rate and payments will be a lot higher when your initial period is over, even if interest rates are stable.
ARMs have an adjustment period where the interest rate and monthly payment changes. These adjustment periods can occur every month, quarter, or year. For example, a loan with an adjustment period of one year is called a one-year ARM, and the interest rate and payment can change once every year; a loan with a five-year adjustment period is called a five-year ARM, and so on.
The interest rate for an ARM depends on two main components: the index and margin. The index measures the interest rate and the margin is an extra amount your lender adds. Your monthly payments will be influenced by any caps, limits, or how high or low your rate is. For example, if the index goes up, so will your interest rate, and most likely, your monthly payments. If the index goes down, so will your interest rate and monthly payments.
ARM rates vary from lender to lender. However, most lenders use the same variety of indexes to project an interest rate. For example, the most common indexes include the rates on one-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). On the other hand, some lenders use their own cost of funds as an index. Before picking a lender, ask what index they use and how it fluctuates. This will give you a better idea of what you can expect with that lender and loan.
The margin is an added percentage to the interest rate on an ARM. Just like interest rates, margins can differ from lender to lender, but it usually remains consistent over the term of the loan. The index plus the margin is known as the fully indexed rate. For example, if a lender uses an index that is 3% and adds a 3% margin, the fully indexed rate would be 6%. Some lenders base the amount of margin they add off your credit score. Meaning, if you have a high credit score, a lower percentage margin will be added, and you will pay less interest over the life of your loan.
What is the Difference Between a Fixed-Rate and an Adjustable-Rate Mortgage (ARM)?
The difference between a fixed-rate and adjustable-rate mortgage (ARM) is that the interest rate for fixed-rate mortgages will stay the same over the life of the loan. With an ARM, the interest may increase or decrease.
People are attracted to ARMs initially because they begin with a lower interest rate than fixed-rate mortgages. This interest rate may stay the same throughout the introductory period, which usually ranges between several months and a few years. Once this period is over, your interest rate will change, and so will monthly payments.
An ARM’s interest rate is based on an index that refers to several indicators, such as the one-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). If the index goes up, so will your interest rate, and monthly payments; if the index goes down, so will your interest rate, and monthly payments.
With a fixed-rate mortgage, monthly payments and interest rates will remain consistent throughout the entire loan. This option makes it easier for borrowers to budget and manage their finances.
As you can see, ARMs can be great but include some factors that are out of your control. If you have any further questions about Adjustable Rate Mortgages, don’t hesitate to reach out.
MORTGAGE Rates
| Averages | Current | Previous | Change |
|---|
Mortgage News Daily
updated daily| 30 Yr Fixed | 7.29 | 7.24 | +0.05 |
| 15 Yr Fixed | 6.64 | 6.59 | +0.05 |
| FHA 30 Yr | 6.75 | 6.73 | +0.02 |
| Jumbo 30 Yr | 7.34 | 7.33 | +0.01 |
| 5/1 Yr ARM | 7.09 | 7.04 | +0.05 |
| VA 30 Yr | 6.75 | 6.72 | +0.03 |
Freddie Mac
updated weekly| 30 Yr Fixed | 7.18 | 6.61 | +0.57 |
| 15 Yr Fixed | 6.51 | 5.98 | +0.53 |
| 5/1 Yr ARMr | 6.06 | 6.95 | +0.11 |
30 Yr Fixed
In and of itself, today wasn't too bad for mortgage rates. Things got a bit worse, but the change from yesterday was average or slightly lower. There's even still a little bit of a cushion...
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FAQ
What is the first step of the home buying process?
Getting pre-approved for a mortgage is the first step of the home buying process. Getting a pre-approval letter from a lender gets the ball rolling in the right direction. Here’s why: First, you need to know how much you can borrow. Knowing how much home you can afford narrows down online home searching to suitable properties, thus no time is wasted considering homes that are not within your budget. (Pre-approvals also help prevent disappointment caused by falling in love with unaffordable homes.) Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. You may need more time to save up money, liquidate other assets or seek mortgage gift funds from your family. In any case, you will have a clear picture of what is financially required. Finally, being pre-approved for a mortgage demonstrates that you are a serious buyer to both your real estate agent and the person selling their home.
How long does it take to buy a home?
Getting pre-approved for a mortgage is the first step of the home buying process. Getting a pre-approval letter from a lender gets the ball rolling in the right direction. Here’s why: First, you need to know how much you can borrow. Knowing how much home you can afford narrows down online home searching to suitable properties, thus no time is wasted considering homes that are not within your budget. (Pre-approvals also help prevent disappointment caused by falling in love with unaffordable homes.) Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. You may need more time to save up money, liquidate other assets or seek mortgage gift funds from your family. In any case, you will have a clear picture of what is financially required. Finally, being pre-approved for a mortgage demonstrates that you are a serious buyer to both your real estate agent and the person selling their home.
What is a seller’s market?
Getting pre-approved for a mortgage is the first step of the home buying process. Getting a pre-approval letter from a lender gets the ball rolling in the right direction. Here’s why: First, you need to know how much you can borrow. Knowing how much home you can afford narrows down online home searching to suitable properties, thus no time is wasted considering homes that are not within your budget. (Pre-approvals also help prevent disappointment caused by falling in love with unaffordable homes.) Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. You may need more time to save up money, liquidate other assets or seek mortgage gift funds from your family. In any case, you will have a clear picture of what is financially required. Finally, being pre-approved for a mortgage demonstrates that you are a serious buyer to both your real estate agent and the person selling their home.
What is a buyer’s market?
A buyer’s market is characterized by declining home prices and reduced demand. Several factors may affect long-term and short-term buyer demand, like economic disruption – a big employer shuts down operations, laying off their workforce. Interest rates trending higher – the amount of money people can borrow to buy a home is reduced because the cost of money is higher, thus reducing the total number of potential buyers in the market. Home prices drop to meet the level of demand and buyers find better deals. Short-term drop in interest rates – can give borrowers a temporary edge with more purchasing power before home prices can react to the recent interest rate changes. High inventory – a new subdivision and can create downward pressure on prices of older homes nearby, particularly if they lack highly desirable features (modern appliances, etc.) Natural disasters – a recent earthquake or flooding can tank property values in the neighborhood where those disruptions occurred.
What is a stratified market?
A stratified market happens where supply and demand characteristics differ by price point, in the same area (typically by city). For example, home sales for properties above $1.5M may be brisk (seller’s market) while homes under $750k may be sluggish (buyer’s market). This scenario comes along every so often in West Coast cities where international investors – looking to park their money in the United States – buy expensive real estate. At the same time, home sales activity in mid-priced homes could be entirely different.
How much do I have to pay an agent to help me buy a house?
Home shoppers pay little or no fees to an agent to buy a home. Here’s why: For most home sales, there are two real estate agents involved in the deal: one that represents the seller and another who represents the buyer. Listing brokers represent sellers and charge a fee to represent them and market the property. Marketing may include advertising expenses such as radio spots, print ads, television and internet ads. The property will also be placed in the local multiple listing service (MLS), where other agents in the area (and nationally) will be able to search and find the home for sale. Agents who represent buyers (a.k.a. buyer’s agent) are compensated by the listing broker for bringing home buyers to the table. When the home is sold, the listing broker splits the listing fee with the buyer’s agent. Thus, buyers don’t pay their agents.
What kind of credit score do I need to buy a home?
Most loan programs require a FICO score of 620 or better. Borrowers with higher credit scores represent less risk to the lender, often resulting in a lower down payment requirement and better interest rate. Conversely, home shoppers with lower credit scores may need to bring more money to the table (or accept a higher interest rate) to offset the lender’s risk.
What is the first step of the home buying process?
Getting pre-approved for a mortgage is the first step of the home buying process. Getting a pre-approval letter from a lender gets the ball rolling in the right direction. Here’s why: First, you need to know how much you can borrow. Knowing how much home you can afford narrows down online home searching to suitable properties, thus no time is wasted considering homes that are not within your budget. (Pre-approvals also help prevent disappointment caused by falling in love with unaffordable homes.) Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. You may need more time to save up money, liquidate other assets or seek mortgage gift funds from your family. In any case, you will have a clear picture of what is financially required. Finally, being pre-approved for a mortgage demonstrates that you are a serious buyer to both your real estate agent and the person selling their home.
How long does it take to buy a home?
Getting pre-approved for a mortgage is the first step of the home buying process. Getting a pre-approval letter from a lender gets the ball rolling in the right direction. Here’s why: First, you need to know how much you can borrow. Knowing how much home you can afford narrows down online home searching to suitable properties, thus no time is wasted considering homes that are not within your budget. (Pre-approvals also help prevent disappointment caused by falling in love with unaffordable homes.) Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. You may need more time to save up money, liquidate other assets or seek mortgage gift funds from your family. In any case, you will have a clear picture of what is financially required. Finally, being pre-approved for a mortgage demonstrates that you are a serious buyer to both your real estate agent and the person selling their home.
What is a seller’s market?
Getting pre-approved for a mortgage is the first step of the home buying process. Getting a pre-approval letter from a lender gets the ball rolling in the right direction. Here’s why: First, you need to know how much you can borrow. Knowing how much home you can afford narrows down online home searching to suitable properties, thus no time is wasted considering homes that are not within your budget. (Pre-approvals also help prevent disappointment caused by falling in love with unaffordable homes.) Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. You may need more time to save up money, liquidate other assets or seek mortgage gift funds from your family. In any case, you will have a clear picture of what is financially required. Finally, being pre-approved for a mortgage demonstrates that you are a serious buyer to both your real estate agent and the person selling their home.
What is a buyer’s market?
A buyer’s market is characterized by declining home prices and reduced demand. Several factors may affect long-term and short-term buyer demand, like economic disruption – a big employer shuts down operations, laying off their workforce. Interest rates trending higher – the amount of money people can borrow to buy a home is reduced because the cost of money is higher, thus reducing the total number of potential buyers in the market. Home prices drop to meet the level of demand and buyers find better deals. Short-term drop in interest rates – can give borrowers a temporary edge with more purchasing power before home prices can react to the recent interest rate changes. High inventory – a new subdivision and can create downward pressure on prices of older homes nearby, particularly if they lack highly desirable features (modern appliances, etc.) Natural disasters – a recent earthquake or flooding can tank property values in the neighborhood where those disruptions occurred.
What is a stratified market?
A stratified market happens where supply and demand characteristics differ by price point, in the same area (typically by city). For example, home sales for properties above $1.5M may be brisk (seller’s market) while homes under $750k may be sluggish (buyer’s market). This scenario comes along every so often in West Coast cities where international investors – looking to park their money in the United States – buy expensive real estate. At the same time, home sales activity in mid-priced homes could be entirely different.
How much do I have to pay an agent to help me buy a house?
Home shoppers pay little or no fees to an agent to buy a home. Here’s why: For most home sales, there are two real estate agents involved in the deal: one that represents the seller and another who represents the buyer. Listing brokers represent sellers and charge a fee to represent them and market the property. Marketing may include advertising expenses such as radio spots, print ads, television and internet ads. The property will also be placed in the local multiple listing service (MLS), where other agents in the area (and nationally) will be able to search and find the home for sale. Agents who represent buyers (a.k.a. buyer’s agent) are compensated by the listing broker for bringing home buyers to the table. When the home is sold, the listing broker splits the listing fee with the buyer’s agent. Thus, buyers don’t pay their agents.
What kind of credit score do I need to buy a home?
Most loan programs require a FICO score of 620 or better. Borrowers with higher credit scores represent less risk to the lender, often resulting in a lower down payment requirement and better interest rate. Conversely, home shoppers with lower credit scores may need to bring more money to the table (or accept a higher interest rate) to offset the lender’s risk.