Adjustable Mortgage Rates
Adjustable Rate Home Loans (ARMs) are mostly used for home buyers that only plan to own their home for a short period of time or plan on paying off their home in the near future. ARMs give you more affordability and flexibility in your monthly payment as they typically have an interest rate that is 1/2 point to 1 1/2 points lower than a 30 year fixed rate loan. This all depends on the fixed period of the ARM.
Adjustable Rate Home Loans have an initial fixed rate period. Generally, the fixed rate terms are 3, 5,7, or 10 years. After the initial fixed period, the interest rate can adjust up or down. This depends on the index of the loan, the margin, and the “caps”. The index is a published rate relating to either the U.S. Treasury Bond, the London Interbank Offering Rate (LIBOR), or the Cost of Funds Index (COFI). The index is added to the margin (usually anywhere from 1.5 to 3.0) to get the new, adjusted interest rate. The “caps” refer to how much the interest rates can go up or down during the first change, how much it can go up or down each change period after the first change, and the maximum that it can go up or down over the life of the loan.
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