Interest Rate, ARMs
Interest Rate, ARMs Adjustable-rate mortgages
Question: Tell me more about Interest Rate, ARMs?
Answer: Interest Rate, ARMs Adjustable-rate mortgages – As concern continues to grow over consumer awareness about adjustable rate mortgage (ARM) loans, especially among sub-prime borrowers, U.S. regulators and many mortgage lenders have been trying to educate people better about the risks of these loans.
An Adjusting Rate
Unlike a fixed rate mortgage, the interest rate on an ARM loan will change periodically. The amount of time between rate adjustments is called the adjustment period. The most common ARM loans adjust either every year, every three years or every five years. There are other variations that adjust at shorter or longer periods and you should speak with a mortgage professional to decide which type is best for you. No matter when your rate adjusts, you should be prepared for the change.
Rates are Tied To Indexes
How do lenders determine if your rate will go up or down? They base your rate on the movement of a specific market index. There are a dozen or so different indexes that your lender might choose to link to your loan, but they must let you know which one and you can then track its movement. Some of the most popular Interest Rate, ARMs indexes are the one-year, three-year, and five-year Treasury securities. Another common option is the Cost of Funds index.
Once you find out the index your loan is tied to, you can look at the history of its movement to get a rough idea of how it changes and how often. The basic idea though, is that when the index goes up, so does your interest rate and vice versa.
The interest rate and payment adjustments may or may not be scheduled to change at the same time. For example, the interest rate on some plans changes more frequently than the monthly payment, which may result in negative amortization. “This means that the additional interest will be added to the principal balance of the loan and may accrue additional interest itself,” Hymer says. If the monthly payments on an Interest Rate, ARMs are increasing, generally this is because the index is rising or it is a negative amortization ARM. People with adjustable-rate mortgages wanting to know how their payments are calculated might contact their lender or review the language in their loan agreement.