1, 3, 5, 7, 10 Year Adjustable Rate Loan Programs
An Adjustable
Rate Mortgage (ARM) is a mortgage loan that is most widely known for its low
starting interest rate (when compared to the 30 & 15 year mortgage loans).
This 'low' introductory rate is used to calculate the mortgage payment for a
specified period of time. Once this introductory period is over, the interest
rate is adjusted periodically based on a preselected index. The most commonly
used indexes are the yield on the one-year Treasury Bill, the 1 month Libor
(London Interbank Offer Rate), 6 month Libor and 1 Year Libor. The new interest
rate is determined by adding this index to a set margin (which is determined by
the lender). Although there are a variety of adjustable rate mortgage programs
available, the most common program is the One Year Adjustable Mortgage (one Year
ARM). The interest rate on the one year ARM is adjusted once each Year, for 30
years. APR's on variable rate loans are subject to increase but may decrease
from year-to-year, the borrower should be prepared to handle an increase in
his/her monthly payment (should the index rate increase).
What is the LIBOR?
LIBOR stands for London Inter-Bank Offered Rate. This is a
favorable interest rate offered for U.S. dollar deposits between a group of
London banks. There are several different LIBOR rates, defined by the maturity
of their deposit. The LIBOR is an international index that follows world
economic conditions. LIBOR-indexed ARMs offer borrowers aggressive initial rates
and have proven to be competitive with popular ARM indexes like the Treasury
bill.
What is the Margin?
The amount a lender adds to the index of an adjustable
rate mortgage to establish an adjusted interest rate. For example, a margin of
1.50 added to a 7 percent index establishes an adjusted interest rate of 8.50
percent.
What are CAPS?
A limit on the amount the interest rate on an adjustable
rate mortgage may change per year and/or the life of the loan. For example a
2/6/2 cap would mean a maximum interest increase of at the first cahnge date, 6%
over the life of the loan and no more than 2% each year.
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