• Scott Kepler

    NMLS #833792

    (813) 444-8537


  • An adjustable rate mortgage (ARM), variable rate mortgage or floating rate mortgage is a mortgage loan where the interest rate on the note is periodically adjusted based on an index. An Adjustable Rate Mortgage, or ARM as it is popularly referred to, is a loan option whose interest rate changes after a fixed number of years (typically 5 or 7 years). After this fixed period, the rate will likely adjust, either increasing or decreasing your monthly payments.

    An ARM is a common alternative to a fixed rate mortgage, typically offering lower interest rates than you would be able to obtain with a fixed rate mortgage. While potentially unpredictable, they can be a great home loan alternative in comparison to a long term mortgage like a 30 year-fixed rate mortgage.

    Why Should I Choose an ARM?

    Are you thinking about moving or upgrading your home in a few years? Adjustable rate mortgages are a cheaper way to buy a home when you don't plan on staying in it past 7 years, due to their lower interest rates and ultimately, lower monthly payments.

    If you want the lowest rate currently available, an ARM can provide you with it. ARMs transfer part of the usual "interest rate risk" carried by all home loans, from the lender to the borrower since the borrower is taking advantage of lower initial payments by risking the possibility that the mortgage interest rate could increase after the initial term.

    In addition, an ARM is a great way to qualify for a higher loan amount, allowing you to purchase a more valuable house. People who take out very large mortgages tend to get a 1-year ARM then refinance it to keep their rate from increasing. Thanks to the low rates available with an adjustable rate mortgages, you'll be able to buy a more expensive home while taking advantage of the lowest possible mortgage payment available.

    Characteristics of the ARM loans

    How an ARM Works

    The borrower's interest rate is determined by the cost of money at the time the loan is made. Then the rate is tied to a recognized index your lender is currently using for this loan. Your future interest adjustments are then based on the upward or downward movements of this index. An index is a reliable statistical report that reflects the approximate change in the cost of money. Some examples of this would be the monthly average yield on three-year treasury securities, or the national average mortgage contract rate for purchases on previously occupied homes. The rise and fall of your payments will fluctuate with the index preferred by the lender for this loan program when your loan was made.

    To insure that the expenses of administration and profit are included in the payments to the lender, it is necessary for the lender to add a margin to the index. Different lenders use different margins, which explain the variation in interest rates offered for the same loan program. Margins range from 2% to 4% and are added to the index to come up with the interest rate you pay (margin + index = interest rate). It is the fluctuation of the index rate that causes the borrowers interest rate to increase or decrease.

    ARM home loans are based on Index

    Variable or adjustable loan is loan whose interest rate, and accordingly monthly payments, fluctuates over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application. All adjustable rate mortgages have an adjusting interest rate tied to an index. Six common indices in the United States are:

    Well known ARM indexes include:

    • Constant Maturity Treasury (CMT)
    • Treasury Bill (T-Bill)
    • 12-Month Treasury Average (MTA or MAT)
    • Certificate of Deposit Index (CODI)
    • 11th District Cost of Funds Index (COFI)
    • Cost of Savings Index (COSI)
    • London Inter-Bank Offering Rates (LIBOR)
    • Certificates of Deposit (CD) Indexes
    • Bank Prime Loan (Prime Rate)
    • Fannie Mae's Required Net Yield (RNY)
    • National Average Contract Mortgage Rate
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    Why Adjustable Interest Rates are lower than Fixed Rates?

    Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.

    Additionally, lenders in many markets rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the (expected) higher default rates.

    Fixed Rate or Adjustable. Which is Right for You?

    Here is the simplest definition of the different loan types. If you are someone who is more comfortable with always knowing what your payment will be over the term of the loan, than a Fixed Rate Loan may be what you need; however, if you need to qualify for as much of a loan as possible and the initial interest rate on an ARM makes that possible, than an Adjustable Rate Loan may be for you.

    What your lender does is custom tailor your loan to meet your needs so that there are no surprises. The purchase or refinancing of your property with the best possible loan and rate is our only goal.

    Type: 30-Year Fixed Rate Loan
    Definition: The interest rate and payment never change over the 30 year repayment period
    Advantages: Payments never increase
    Disadvantages: Slow equity buildup
    Comments: The most common mortgage in US, good choice when rates are low
    Type: 15-Year Fixed Rate Loan
    Definition: The interest rate and payment never change over the 15 year repayment period
    Advantages: Usually lower interest rate than 30 year fixed rate loan, less interest paid because the loan is paid sooner, faster equity buildup because you are making bigger payments.
    Disadvantages: Higher monthly payments.
    Comments: A good option for those who can handle the higher payments and want shorter pay-off time
    Type: ARM = Adjustable Rate Mortgage
    Definition: The interest rate changes over time
    Advantages: Low interest rate in the beginning sometimes below market rate
    Disadvantages: Payments may rise and this may be a hardship if rates increase significantly
    Comments: Good option if you know your income will rise and/or rates are expected to drop

    We are a customer service oriented company serving the homeowners with sincerity and devotion. Our straightforward business model means a quick mortgage process, Fast Closing, right loan products and lowest interest rates available to our customers. Talk to one of our mortgage professional to see if this form of home loan refinancing is right for you.

    Ready to start now? Visit our online application and you can get your refinance going immediately.

    Other Loan Options to Consider

    • FHA Loan
    • Jumbo Loan
    • 30 Year Fixed Rate Mortgage
    • Interest Only Mortgage