An Adjustable-Rate Mortgage (ARM): Eligibility and Requirements

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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.

"Describe The Difference Between Conventional Mortgages and ARMs, please."

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.

"What Different Types Of Adjustable-Rate Mortgages Are Available Today?"

7/6 Adjustable-Rate Mortgages

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.

10/6 Adjustable-Rate Mortgages

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.

5/6 Adjustable-Rate Mortgages

Same principle here, but with a fixed interest period of 5 years (changing every 6 months after that).

Here Are Other Types Of ARMs
  • An FHA home loan offers you an ARM option.
  • Service members, spouses, and qualified veterans can qualify for an ARM with their VA loan.
  • FHA and VA ARMs have different requirements from our 5/6, 7/6 and 10/6 ARMs.
  • Curious to know which ARM is the best choice for you? Call us now at (805) 434-5226.
"How Are The ARM Mortgage Rates Actually Determined?"

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.

Caps

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:

  • The initial cap sets the floor and the ceiling for your rate when it’s time for the first adjustment.
  • The periodic cap sets the floor and the ceiling for your rate during each adjustment after the first one.
  • The lifetime cap sets the floor and the ceiling for your rate during the life of your loan.

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%.

How We're Calculating Your New Payment

When a rate changes, here’s what we use to set the new payment for your loan:

  • The current unpaid principal balance of your loan
  • The updated interest rate
  • The remaining term of y ourloan

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.

"What Are The Qualifications For An ARM?"

To qualify for an ARM purchase or rate/term refinance on a primary residence, you’ll need:

  • A minimum down payment of 5%
  • A FICO® Score of at least 620
  • A DTI (debt-to-income ratio) that doesn’t exceed 50%. Calculate your DTI by adding monthly debt payments (for example credit card and/or car payments) and simply divide the total amount by your monthly income before taxes.
  • A loan-to-value ratio (LTV) less than 95%
"Can I Refinance An Adjustable-Rate Mortgage, And Should I?"

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.

The Top 5 Adjustable-Rate Mortgage Benefits
  • The initial rate is usually lower compared to a fixed-rate mortgage, making monthly payments more affordable.
  • Caps limit the degree to which your payment and interest rates can rise over the lifetime of your ARM loan. 
  • A great choice if you have plans to pay off your loan in full, or sell the home, prior to the adjustment period kicking in.
  • It’s a wise choice if the fixed-rate period matches how long you’ll be in your home before you move out.
  • There’s a chance your payment will go down if interest rates decrease.
jumbo loan Benefits
Get approved for an Adjustable-Rate Mortgage.

Call us now to get personalized recommendations about an ARM mortgage.

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Benefits Of Claiming An ARM Loan With Crown Mortgage of the West
  • Our Home Loan Experts will be available via phone, chat, and email to guide you through the ARM process.
  • We service around 99% of our mortgages, meaning our dedicated customer service will continue well after you close.
  • After closing your loan, you can manage the home loan online without hidden fees.
  • There are no prepayment penalties if you pay off your entire loan earlier than expected.
Why You Should Choose Crown Mortgage of the West
  • You’ll get access to an online application process, which saves you paperwork.
  • Our Home Loan Experts will be there to answer questions and concerns, and to help you get clear on all the details so you get the perfect mortgage for your needs.
  • After you’ve closed the home loan, you’ll be able to manage your mortgage online without any hidden fees.
  • You can expect customer service long after you’ve closed. You see, we service around 99% of all our mortgages.
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Other Mortgage Options Include:

Keep the following in mind:

  • Mortgage rates are in constant flux.
  • Your actual mortgage payments will vary. This is based on your individual situation as well as current rates.
  • Certain products may not be available in every state.
  • Certain jumbo products are unavailable to first-time homebuyers.
  • Lending services are unavailable in some areas.
  • Certain restrictions could apply based on your location and situation.
  • Unless stated otherwise, we assume a refinance or purchase of a primary residence without a cash-out at closing.
  • Unless stated otherwise, we’ve assumed the following: all costs associated with closing are paid out of your pocket; it’s your primary residence and it’s a single-family home; your debt-to-income ratio (DTI) doesn’t exceed 30%; your credit score is greater than 720 (for certain jumbo products, we assume a credit score of 740 or higher.
  • You have a 40-day lock period for your mortgage rate.
  • If LTV > 80%, PMI will be added to your monthly mortgage payment, with the exception of Military/VA loans (these loans don’t require PMI).
  • Keep in mind that we don’t have all the necessary information to make an accurate assessment if you don’t contact us. At Crown Mortgage of the West, we offer a wide selection of home loan options. Do you want more precise and personalized results? Call us at (805) 434-5226 right now, and speak to one of our mortgage experts.

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