Adjustable Rate Mortgage (ARM) loans have a rate that is fixed for a specific period of time and then will adjust periodically. When evaluating any adjustable rate loan there are several things in addition to the rate that you will need to evaluate.
1) Fixed Period – An adjustable rate loan will always have a period of time where the rate is fixed. These fixed periods can range from 1 month to 10 years, although many lenders have dropped their 10 year offering as their pricing was actually higher than fixed rates. As fixed rates rise, it will be interesting to see if they make a comeback. There are several measures you should consider when looking at the fixed period such as the length of time you plan to remain in the home and your tolerance for potential changes in rate in the future.
2) The index the loan is written against is one of the most important factors to consider because the index will have a huge impact on your rate after the fixed period. In years past, an adjustable rate loan was usually tied only to the 1 year constant maturity treasury index (the average cost of short term borrowing by the Federal Government). However, today loans are available which are tied to many other indexes. Our team can step you through this.