Adjustable Rate Mortgage, also known as ARM's are typically offered from 5-year and 7-year terms. They can be advantageous if you have the intention to refinance or sell within the allotted time frame, since the interest rates periodically fluctuates. This type of loan can give you a reduced interest rate over the course of it, but they are riskier than traditional, conventional loans such as a 15 or 30 year fixed-rate mortgage.
These are some of the basic, but crucial features for an adjustable rate mortgage:
Initial Interest: The initial interest is the rate that you receive when you first set up your mortgage.
Adjustment Rate: The adjustment period is the point where your adjustable rate, that has gone unchanged up until this point, is adjusted. Your monthly loan payment is then recalculated.
Index: The index rate is generally determined by the adjustable rate mortgage changes. Lenders base adjustable rate mortgages on a variety of indices, one of the indexes being the national or regional average cost of funds to savings and loan associations.
The Margin: The margin is what the lender will add to the index rate, this will help them determine the adjustable rate mortgage interest rate.
Interest Rate Cap: An interest rate cap is the limit of times a monthly payment or interest rate can be changed, either over the life of the loan or at the end of each adjustment period.
Initial discounts: Initial discounts, they are often used as promotion aids – they usually reduce the interest rate, below the current rate.
Negative amortization: When the mortgage balance starts increasing, generally due to the monthly payments not being large enough to pay all the interest. This happens when the adjustable rate mortgage is lower than the payment cap.
Conversion: This is a clause a lender may have in the agreement where the buyer can convert their adjustable rate mortgage to a fixed- rate mortgage at certain times.
Prepayment: In some cases, depending on the buyer’s agreement, you may have to pay a fee or penalties for paying off the adjustable rate mortgage early. These are usually negotiable.
If you believe that the most suitable option for your distinct situation is an adjustable rate mortgage in Jacksonville, FL, the team from Carbon Capital can help you determine if that is indeed the case. With our sophisticated tools and extensive knowledge, we will help you establish a plan and ensure that you obtain the loan that you need.
5-Year Adjustable Rate Mortgages
The 5-year mortgage constitutes for approximately one-third of all adjustable rate mortgages due to its variety of unique features. The initial interest rate remains the same for 5 years, at which point the borrower can renew the terms for the next 5 years. These 5-year increments continue until the mortgage amount is fully repaid.
A 5-year adjustable rate mortgage is the ideal option for those wanting the lowest interest rates. One unique feature is that you must meet all standards of approval regardless of the interest rate or loan term, as this helps reduce lender risk and borrower uncertainty.
Adjustable rate mortgages are generally, but not always, cheaper. The adjustable rate fluctuates periodically, therefore you’re paying what the rate is currently instead of a fixed rate. As these loans can be riskier than traditional loans, it is always recommended to speak to a professional to get a full understanding if an adjustable rate mortgage is right for you.