Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage, which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are often amortized over a period of 30 years, with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans typically range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds (COFI).