Adjustable Rate Mortgages (ARM)
Box Home Loans offers Adjustable Rate Mortgages (ARM’s) in a 5/1 ARM term. Adjustable Rate Mortgages differ from fixed-rate mortgages in that the interest rate may go up or down. Many adjustable rate mortgages will start at a lower rate than a fixed rate mortgage. ARM’s are attractive because they offer low initial payments, and help a borrower in some cases to qualify for a larger loan than they would qualify for with a fixed rate mortgage.
Is an Adjustable Rate Mortgage Right for Me?
There are a few additional things borrowers should understand before deciding on an Adjustable Rate Mortgage explained below.
An ARM could be the right loan if one of the following is true:
- Low payments during the initial fixed period are a primary concern
- Borrower does not plan on living in the property long enough for interest rates to rise
If interest rates are high and expected to fall, an ARM loan will help the borrower have a lower interest rate without the need to refinance. If interest rates are expected to rise and a set payment is important to the borrower then a fixed-rate mortgage may be a better option.
For any questions about our Adjustable Rate Mortgages, feel free to chat with a representative immediately, email us, or give us a call at 877 905-0005.
Fixed Rate Period
For a 5/1 ARM the rate will stay fixed for the first 5 years of the loan. So the principal and interest payment will not increase for a period of the first 5 years or 60 months.
The payment can fluctuate if the borrower’s loan includes escrows for property taxes and homeowners insurance premiums. These amounts fluctuate based on the premiums charged by the insurance company and the property taxes determined by the local governing authority, not based on the interest rate of the note.
There is an index rate that is tied to an Adjustable Rate Mortgage. Box Home Loans ARMs are tied to the 1 year LIBOR index. LIBOR stands for “London Inter-Bank Offered Rate.” It is based on rates that contributor banks in London offer each other for inter-bank deposits. Essentially, a LIBOR is a rate at which a fellow London bank can borrower money from other banks. Borrowers can easily research the history of this index by searching online for “History of LIBOR Index.” The index is a variable that changes throughout time which impacts the interest rate of an ARM after the fixed rate period ends.
Every mortgage has a margin that is set for a loan. A margin is a fixed rate that is added to the index value to determine the fully indexed interest rate of an adjustable rate mortgage (ARM). The margin is constant throughout the life of the mortgage. In other words, the margin is fixed.
Fully Indexed Interest Rate
After the fixed period the interest rate will be recalculated every 12 months for the 5/1 ARM. There is a formula that is used to determine the new interest rate. That formula is:
Fully Indexed Interest Rate = Mortgage Margin + Index Rate
Caps and Ceiling for Adjustable Rate Mortgages
In addition to the margin, there are other factors that determine the new rate. These are called caps and ceiling. Caps are the limit on the amount the interest rate can increase or decrease each adjustment period. The maximum amount an interest rate can increase or decrease every 12 months period is 2.0% from the last calculated rate period. This is the cap in how much variability there can be in an interest rate each year.
A ceiling is the maximum amount the interest rate can reach during the term of the note. The maximum ceiling for the 5/1 ARM is 5% over the initial note rate.
Box Home Loans ARM’s margin is 2.25%. The caps/ceiling ratios on the 5/1 ARM are 2/2/5.