Adjustable Rate Mortgage Loans (ARMs)

---

One mortgage loan product that might be suitable for your financial goals is an Adjustable Rate Mortgage, also known as an ARM. In this guide, we will delve into ARM Loans, compare them to other loan products, highlight their benefits, and provide an overview of available options for ARM Loans.

What is an ARM Loan?

An ARM Loan is a type of mortgage where the interest rate is not fixed and can fluctuate over time based on changes in market conditions. ARMs typically have an initial fixed-rate period, after which the rate adjusts periodically. There are two different periods to an ARM. One is the fixed period, and the other is the adjusted period. Available options for ARM Loans are:

1. 5/1 ARM: has an initial fixed-rate period of 5 years. After the fixed-rate period, the rate adjusts annually. Popular choice for borrowers who plan to sell or refinance within the first 5 years. 
2. 7/1 ARM: with a 7 year initial fixed-rate period, this option provides borrowers with stability for a longer duration before the annual rate adjustments begin.
3. 10/1 ARM: provides the longest initial fixed-rate period of 10 years, providing borrowers with an extended period of stability before the rates adjust annually. 

How is the Adjustable Rate on an ARM is determined?

The adjustable rate is determined by 2 primary factors; an Index and a Margin. Let's explore these concepts in detail:

• The Index is a benchmark interest rate that serves as the basis for determining the adjustable rate on an ARM Loan. The London Interbank Offered Rate (LIBOR) used to be the typically Index, when it was replaced by the Secured Overnight Financing Rate (SOFR).  The Index reflects the general movement of interest rates in the market.
• The Margin is a fixed percentage added to the Index to determine the interest rate on an ARM. It represents the lender's profit margin and covers their costs and potential risks that may be associated with the loan. The Margin remains constant and does not change throughout the life of the loan. 

To Calculate the Adjustable Rate, the lender takes the current value of the chosen index and adds the margin to it. For example, at the end of the fixed-rate period, the SOFR Index is 3% and the margin is 2%, your adjustable rate would be 5%. Most ARMs have caps that do not allow the rate to go up or down by 2% per adjustment period. 

In comparison to fixed-rate loans, the initial fixed-rate period of an ARM often comes with a lower interest rate. ARM Loans are available for Conventional, FHA, and VA programs, providing additional flexibility and options. 

When considering an ARM Loan, it is essential to carefully evaluate your situation, long-term goals, and risk tolerance before opting for this loan. Ensure that you have met with a financial advisor or consult with a mortgage professional that you have an Exit-Strategy in place as the fixed-rate period ends.