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 Differences between adjustable rate mortgages (ARMs)
  ARM rate adjustments and interest rate caps
By the EchoBay Loans Expert
 Differences between adjustable rate mortgages (ARMs)
Dear EchoBay Expert: There are so many different types of adjustable rate mortgages my mortgage broker has suggested to me and also I've found through online lenders. What's the difference between all these ARMs?

Dear Loyal Reader: Adjustable rate mortgages all have one thing in common; their interest rates can, and usually do, fluctuate. However, that is often where the similarities end. You're right, there are a number of ARM loans available, and it can become overwhelming when they're all thrown at you at once.

Most ARMs have rate caps that protect you from severe interest increases, though the exact caps will vary from loan to loan. Make sure that the cap of the ARM that you're considering is a rate cap and not a payment cap, because a payment cap might result in a negative amortization if interest rates take a substantial hike. The adjustment periods of ARM loans will also vary.

For example, with a 3/1 ARM, the interest rate will adjust annually after the first three years and with a 5/1 ARM, it will adjust annually after the first five years. ARMs also come in an interest-only package. This type of ARM allows you to pay only interest for a set period at the beginning of your loan term (usually from 1 to 10 years), allowing you a much smaller mortgage payment.

A hybrid is another form of an ARM that eventually converts from a fixed-rate loan into an adjustable rate mortgage. On the other side of that coin are the convertible ARMs that allow you to covert from an adjustable rate to a fixed interest rate at a designated time.

With the variety of ARMs available, it shouldn't be hard to find the one that best suits your needs.



 ARM rate adjustments and interest rate caps
Dear EchoBay Expert: I've been researching whether an adjustable rate mortgage will save me the most money on my mortgage payments. What do I need to know about rate adjustments and interest rate caps?

Dear Loyal Reader: Adjustable rate mortgages (ARMs) can save you a great deal of money but only if the rates go in your favor. There are a few terms you need to be familiar with before taking out an adjustable rate mortgage.

1. Adjustment period:
This is the period between rate changes (in years). The last number is the adjustment period. For instance, on a 3/1 ARM, the adjustment period is one or once a year. The first number represents the amount of time before the first rate change. In this case, it would be three years.

2. Interest rate cap:
This is a cap that is placed on your interest rate that keeps it from increasing above a certain percentage. There are two types of caps - periodic and lifetime.

A periodic cap is the maximum your rate can increase during one adjustment period (typically one year). The lifetime cap is the maximum your rate can increase over the life of the loan. One of the most important calculations for you is what your payment will be if your loan hits the lifetime cap.

Can you still afford your payments if this happens? Many times ARMs are very attractive in the beginning of the loan when rates are low but as rates begin to increase, the owner of this type of loan can quickly find himself in trouble.

Another factor to consider is how long you plan to stay in your home. If you only plan to own your home for five years, taking advantage of a 5/1 ARM could save you thousands. If your plans come to fruition, you will have sold the house before the first rate change and enjoyed a low interest rate during your home ownership.


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Avg. National Rates
30 Yr Fixed 5.78%
15 Yr Fixed 5.39%
1 Yr ARM 4.80%
WSJ Prime 6.50%
Fed Funds 3.50%

 



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