Nothing to stress over. Adjustable mortgage just means you've negotiated an adjustable rate or ARM, with your lender. These loan programs allow for a change of interest rates throughout the life of the loan adjusted by the terms agreed to between the lender and borrower - usually once or twice per year. There are four basics for adjustable mortgage rates (ARMs): 1. The Index
2. The Margin
3. The Adjustment Period
4. Rate Caps The index is what your interest rate is tied to. In other words, your index can actually be anything you agree upon, but most ARMs are indexed to a 1-year treasury, or something called LIBOR (London Inter-Bank Offered Rate). The LIBOR index is released each business day and is the index by which banks lend money to one another over the short term. The margin is the difference between your mortgage rate and your index. The index is what your rate is based upon and the lender adds a margin to it to arrive at your note amount. This is also called your fully indexed rate, the number reached when you total your index to your margin. Common margins can range anywhere between 2 and 2.75 percent, although some loans let you pay extra fees, such as a discount point to get a lower margin. The adjustment period is simply the period after which your rate can adjust. At the end of each adjustment period, your margin is added to the current index to get your new rate. Sometimes the rate won't change, but can very often along with the index. Rate caps refer to how high your rate is permitted to change during each adjustment period. This is often a welcome point of any adjustable mortgage rate, as the consumer is protected from wild swings in their loan index by limiting the increase from adjustment period to adjustment period. Some caps are called lifetime caps which means just that - no matter what, the interest rate can never be higher than the cap. Other types of adjustables have an initial cap, meaning that at the very first adjustment period the cap is 5 percent or 6 percent, or whatever the agreed-upon loan arrangements actually are. Though large banks and mortgage firms try to tell you how easy it is to apply for and get a mortgage, the bottom line is: If you don't ask the right questions and have a basic knowledge of how mortgages work, you're not really going to get the best deal. Your application may even be rejected. Learn what your options are so you can find and secure the best loan - whether adjustable mortgage rated or not. |
