Adjustable Rate Mortgage

Jon Shibley, President & CEO, Lenox Financial

Short Term Loans

Adjustable rate mortgages (ARMs) are designed for someone that will be in a home for a short period of time because the fixed rate component does not last through the full term of the loan.

For example a 3/1 ARM will be fixed for three years and it will adjust every 12 months afterwards. A 5/1 ARM will be fixed for five years and will adjust every 12 months afterwards. A 7/1 ARM will be fixed for seven years and will adjust every 12 months afterwards.

Interest-Only ARMs

Interest-Only ARMs are similar to a traditional ARM. The only difference is that you are allowed to pay interest only and no principal to the loan.

One thing that you have to be aware of is when these ARMs adjust, it is the function of two components: 1) a margin that is assigned at the beginning of the loan and 2) an index that changes monthly. The margin never changes, the index changes monthly. So if you are in a 5/1 ARM, at the end of the first five years the ARM will adjust. It adjusts by adding the margin which was set at the beginning of the loan plus the value index. The two factors combined will determine your adjusted rate. There is a safety component added which is called a “cap” that will keep your rate from going to the moon.

Always be Wary

Always be wary of an ARM that has a negative payment feature. Option ARMs are notorious for it. You will get four payment options, and one of them is going to be very, very low. This is okay because it doesn’t hurt you for the first few months, but once that rate starts to adjust, the lender will continue to give you the option to make that minimum payment based on the tease rate; however, the lender is going to take the difference between your actual payment and add it to the back of the mortgage in the form of negative amortization. Be careful of these programs!

Choose No Closing Cost

Whatever loan you select, choose it with no closing cost. When you are not investing thousands of dollars, there is no barrier to refinancing. If any of these products become too aggressive or look like they are going to put you in a bad position, we will take you right out of it and we will use a no closing cost mortgage, assuming you qualify for a no closing cost loan.