An Adjustable Rate Mortgage (ARM) is a loan that has an adjusting or a variable interest rate. When choosing an ARM loan pay particular attention to the following categories:

Adjustment Period- Know how often the rate will adjust (Annually, Bi-annually, Fixed for an extended period of time before becoming adjustable).

Cap- ARMs typically have an adjustment cap and a lifetime cap this is the maximum amount the rate can adjust per period and over the life of the loan.

Index- ARMs adjust according to predetermined monetary indexes. For instance, a 1 year ARM typically follows the 1 year treasury index. When it comes time for your loan to adjust a margin will be added to the current index to determine the new interest rate.

Margin- ARMs typically have a margin between 2.25% and 2.75%. Remember that the margin will be added to the index--not to exceed the cap rate--when determining what the new interest rate will be.
Although many people try to shy away from ARMs, they can be very beneficial to your individual situation. If you understand the above mentioned categories, you will find that ARMs are not a dangerous option and that they might very well benefit you. There are various ARM products and very specific terms so please see your Loan Officer for more details.

Example

Based on a Sales Price of $130,000