Adjustable rate mortgage loans, or ARMs, are a wonderful option for home buyers who move frequently. Unlike a fixed rate mortgage, the interest on an ARM changes throughout the life of the loan. Loan terms vary widely from one ARM to the next, so understanding exactly what you’re getting into may take the help of a dedicated mortgage consultant.
ARMs typically have lower interest rates than fixed rate mortgages. The initial rate is locked in for a number of years – typically 3, 5, or 10 – before the interest rate changes. If you don’t intend on staying in your home for many years, an ARM may be the perfect financial product for your home purchase.
Once your initial rate period ends, your loan’s interest will change based on federal interest rates. How much this changes depends on your margin. For instance, if the federal interest rate is 4%, and your margin is 2%, your loan’s interest rate will change to 6%. Your interest may change yearly, every 3 years, every 5 years or every 10 years or more. This is determined by your adjustment period. Thankfully, there are measures in place to prevent your payments from getting out of control.
To protect consumers, each adjustable rate product comes with caps that limit changes to keep payments reasonable. For instance, your lifetime cap will determine how far your interest can be increased. A payment cap will determine how high your monthly payments can go, regardless of changes to national interest rates. It’s important to work with a lending professional to understand your caps, to avoid future payment amounts you can’t afford.
There are many types of adjustable rate mortgage loans on the market, including interest-only loans, hybrid products, and more. Finding the right one for your situation may take a professional touch. Contact a Midland Mortgage Corporation consultant about these and other special lending products, including our jumbo loans.