A mortgage in which the interest rate paid on the outstanding balance change according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month.
Mortgage adjustable rate or mortgage ARM
There are two way for interest rate you will be paying .
1. Fixed Rate Mortgage or you can say\ FRM.
2. Adjustable Rate Mortgage or Mortgage adjustable rate or ARM.
Mortgage adjustable rate or ARM is one in which the rate changes (adjusts) on a specified schedule after an initial “fixed” period.
In mortgage adjustable rate, the amount of interest rate may change over the time. It may come down or may go up. As interest rates rise and fall in general, rates on adjustable rate mortgages follow.
Some of the key components of an Adjustable Rate Mortgage include Index, and Margin. The index rate may change over the life of the loan, but the margin stays at a pre-determined value set by your lender. This margin is added to the index which collectively makes your interest rate.
An ARM's margin is a very important and often overlooked part of the loan's interest rate. The margin is frequently negotiable with the lender. Different margins should be expected with different indexes as various popular indexes differ in their historical values relative to each other. In other words, the lower the index level, the higher the expected margin. When various index/margin options are available to a borrower, an analysis should be performed to determine which is the most economical.
An adjustable rate mortgage is a long-term loan you use to finance a real estate purchase, typically a home.
Unlike a fixed-rate mortgage, where the interest rate remains the same for the term of the loan, the interest rate on an ARM is adjusted, or changed, during its term.
The initial rate on an ARM is usually lower than the rate on a fixed-rate mortgage for the same term, which means it may be easier to qualify for an ARM. You take the risk, however, that interest rates may rise, increasing the cost of your mortgage. Of course, it's also possible that the rates may drop, decreasing your payments.
The rate adjustments, which are based on changes in one of the publicly reported indexes that reflect market rates, occur at preset times, usually once a year but sometimes less often. Typically, rate changes on ARMs are capped both annually and over the term of the loan, which helps protect you in the case of a rapid or sustained increase in market rates.
However, certain ARMs allow negative amortization, which means additional interest could accumulate on the outstanding balance if market rates rise higher than the cap. That interest would be due when the loan matured or if you want to prepay.
An “adjustable-rate mortgage” refers to a loan program with a variable interest rate that can change throughout the life of the loan. It differs from a fixed-rate mortgage, as the rate may move up or down depending on the direction of the index it is associated with.
Adjustable-rate mortgages carry payment caps, which limit the amount of rate change that can occur in certain time periods. There are three types of caps:
Initial: The amount the rate can change at the time of the first variable period. In the examples above, it would be the initial change after the first 5 years of the loan.
Periodic: The amount the rate can change during each period, which in this case of a 5/6 ARM is every six months, or just once a year for a 5/1 ARM.
Lifetime: The amount the rate can change during the life of loan. So throughout the full 30 years, it can’t exceed this amount, or drop below this amount.
Most homeowners get into adjustable-rate mortgages for the lower initial payment, and then usually refinance the loan when the fixed period ends. At that time, the interest rate becomes variable, or adjustable, and the homeowner would likely refinance into another ARM, something fixed, or sell the home outright.