ARM Adjustable Rate Mortgage
An adjustable rate mortgage has an interest rate that adjusts periodically according to the financial index it is based on plus a margin. The financial index is tied to our economic climate in some way or another. The margin stays the same, the index may change, and therefore the rate may change to the point of the index and margin added together, this is called “fully indexed”.
To limit the borrower’s risk, the ARM (adjustable rate mortgage) will usually have a payment or rate cap. A payment cap is a limit on the monthly payment. A rate cap is a limit on the amount the interest rate can increase. A periodic cap limits the amount the interest rate can increase at the time of each periodic adjustment. A life cap restricts the amount the interest rate can increase over the entire life of the loan. ARM programs range from models which adjust monthly to ones that are fixed for 5, 7, or 10 years before adjusting.
The adjustable rate mortgage is right for a borrower who wants to have a lower than market rate payment for a pre-determined period of time.