How does an ARM work?

Asked by Joejen97, Portland, OR Fri Jan 20, 2012

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Ron Thomas, Agent, Fresno, CA
Fri Jan 20, 2012
ARMs is abig reason why a lot of people have gotten in trouble.
Listen to Ann; do you actually think Rates will go down?

Good luck and may God bless
1 vote
Tom Inglesby, Agent, Portland, OR
Mon May 7, 2012
The only reason a buyer took out an ARM adjustable rate mortgage was to qualify for a larger house payment and that got many buyers into trouble in the last 5 years. Today with interest rates at 50 year lows and ARM's at about the same rate there is no reason to take out an adjustable loan unless that you know the in the next 4 years you will be moving and getting rid of the loan and in this case you really might consider what the savings would be if the ARM adjusted up and to compare the savings over a fixed rate in the next 3-5 years. I have a feeling that rates will go back up because they are at a 50 year low and they cannot go down any further. If you would have taken out an adjustable loan in the past 15 years your payments would be lower with an ARM than a fixed because the rates have been coming down and the adjustable rates track down ahead of the fixed rates. Today though I would get a fixed rate loan.

Tom Inglesby, Broker
RE/MAX Equity Group
0 votes
Dan Tabit, Agent, Issaquah, WA
Fri Jan 20, 2012
An ARM, Adjustable Rate Mortgage is a loan where the rate will adjust, typically up to twice a year based on a Margin and Index. The index is something independent and public like Treasury Notes or the LIBOR (London Interbank Offered Rate) and these are published daily. The margin is how much higher or lower your rate will be.
Initially your rate may be fixed for a period of time, 6 months, 2 years, 5 years, 7 years and 10 years are most common. The shorter the fixed period the lower the rate usually starts. Once you reach the change date your remaining payments will be adjusted to the new rate to keep you paying on schedule for a 0 balance at the end of the loan.
The benefit of an ARM is the low rate you get locked in for the fixed period. If you know you will be selling in 5 years, a 5/1 ARM may be a good option for you, if you are sure.
The risks are what will happen when things change. Most ARM’s will have a 2 point annual maximum change and a 5 point lifetime change. This means that if you start at 3% your maximum rate would not exceed 8%. Sometimes the first adjustment can be more than the 2% annual cap, but you would stay at the annual cap after that.
My numbers are examples and based on my past experience as a lender. There may be changes to these programs and you will need to review any terms you are offered very carefully. Many people bad mouth these loans, but like any tool, if properly understood and applied can be a good option for many.
0 votes
Ann Ryan, Agent, Doral, FL
Fri Jan 20, 2012
Joe, an ARM is a mortgage where the interest rate varies according to a national index. The basic question you should be asking yourself is whether interest rates will A) stay the same, B) go up, or C) go down over the period of time that you own this property. Unless you think the answer is C) or A) and you're going to end up spending a lot more over the time you would own the property. Oh, and I think most economists would say B) is the most likely answer.
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