ARMs Explained

ARM is an acronym for adjustable rate mortgage. ARMs are mortgage that are tied to a certain index, and will adjust at different periods based on certain economic factors.

Since the American homeowner usually refinances within 7 years, an ARM is sometimes the best mortgage in which to get started.

Some loans have a "cap" on the payment increases, not the interest rate increases. Option ARMs are a good example of this - generally your payment cannot increase more than 7.5% per year. $1000 per month the first year, $1075 the second year and so on.

Most interest only loans are made on an ARM loan. Such as a 3/1 Interest Only ARM. Even though most interest only loans are interest only for the first 5 or 10 years of the loan, this 3/1 I.O. ARM would be fixed for the first 3 years, or for the first 36 months, and then adjust thereafter. Interest only ARM's are a great way to lower your payment and your interest rate.

Most ARMs have a period where the rate is fixed. The fixed rate period can be anything from a couple months to 10 years. Most common ARMs are fixed for the first 2, 3, or 5 years.

Rate adjustments are always "capped", or limited by how much they can increase per adjustment period. For example, many ARMs have a " life cap" of 6%, meaning that a start rate of 5% can never adjust to higher than 11%.

Adjustable rate mortgages are also called variable rate mortgages or hybrid mortgages.

All Adjustable Rate Mortgages (ARM) have interest rates that are based on an index and a margin. The index is always some widely published interest gauge, such as the T-bill, LIBOR, COFI, etc. The margin is added to the index to determined the mortgage note rate.