- Brian Lardner
- #1833652 #324324
- (805) 434-5226
- brian@crownmortgageofthewest.com
Known as a variable-rate mortgage, an adjustable-rate mortgage is a loan with an interest rate that changes over time.
ARMs provide an initial, fixed interest rate for a set time period – usually 10, 7, or 5 years.
Your interest rate will change every 6 months, based on the current market. Your monthly mortgage payment may change twice a year based on the current interest rates. Your interest rate won’t increase by more than 5% of the initially agreed upon rate during the life of your loan, however.
Adjustable-rate home loans are displayed as two numbers with a slash between them. The first number is for the number of years the interest rate is fixed.
The specific number following the slash indicates how many months your adjustment period is. For instance, a 5/6 ARM has a fixed interest rate for 5 years, after which the rate will adjust every 6 months.
Conventional mortgages are basically fixed-rate home loans with a steady/fixed interest rate, meaning it won’t fluctuate over the life of your loan.
Adjustable-rate mortgages, in contrast to fixed-rate mortgages, start with a low initial rate for 5, 7, or 10 years, and then it adjusts periodically. The initial fixed interest rate on our ARMs is almost always lower than the corresponding 30-year fixed interest rate.
The mortgage interest rate is 100% fixed for the first 7 years on the 7/6 ARM loan. After that, the interest rate can change every 6 months for the remaining 23 years.
The 10/6 ARM offers a set interest rate for 10 years. After that the rate changes every 6 months for the remaining 20 years.
Same principle here, but with a fixed interest period of 5 years (changing every 6 months after that).
The current ARM interest rates are dependent upon a number of factors, including updated mortgage rates, the SOFR, or the Secured Overnight Financing Rate index, as well as caps.
More on the SOFR Index
The Secured Overnight Financing Rate, SOFR, is the standard measurement for overnight borrowing charges.
It’s calculated by the New York Federal Reserve Bank.
We utilize a 30-day average of the SOFR to set interest rates for adjustable-rate mortgages.
Every adjustable-rate home loan includes a cap that limits how much the interest rate can change during each adjustment date, as well as over the life of your loan.
There are initial caps, periodic caps, and lifetime caps:
These caps are displayed as a series containing three numbers with slashes separating them.
Let’s say you have a 5/6 ARM with 2/1/5 caps. The first digit means that after the first 5 years of a fixed interest rate, the first adjustment will be capped at 2%.
On every subsequent adjustment after that the initial cap can only vary by 1% in either direction.
The final digit tells you that the total lifetime interest of your loan can’t fluctuate more than 5%.
When a rate changes, here’s what we use to set the new payment for your loan:
Since each re-calculation uses the remaining term of the original 30-year loan, you’ll always remain on track to pay off your loan 30 years after the date you close, as long as you stay current with your payments.
To qualify for an ARM purchase or rate/term refinance on a primary residence, you’ll need:
Yes you can, and there are benefits associated with doing so.
You see, when interest rates are lower, refinancing an ARM can give you the security of a low monthly payment for several years to come.
Refinancing in this way could help you consolidate your debt or pay off your home loan faster.
Dial our toll-free number (805) 434-5226 now as you’re reading this. Together with an expert, you’ll determine if this is the right strategy for you.
Call us now to get personalized recommendations about an ARM mortgage.
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#1833652 #324324
Arizona and California Licenses
#1833652 #324324