“Negative Amortization” occurs when your monthly payment changes to an amount less than the amount required to pay interest due. If a loan has negative amortization, you might end up owing more than you originally borrowed. None of the ARMs we offer allow for negative amortization.
An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:
As you can imagine, interest rate caps are very important since no one knows what can happen in the future. All the ARMs we offer have both adjustment and lifetime caps.
To determine the interest rate on an ARM, we add a pre-disclosed amount to the index called the “margin.” If you’re still shopping, comparing one lender’s margin to another’s can be more important than comparing the initial interest rate, since it will be used to calculate the interest rate you will pay in the future.
Our ARM interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indices is published weekly in the Wall Street Journal. If the index rate moves up so does your mortgage interest rate, and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down your monthly payment may decrease.
With most ARMs, the interest rate and monthly payment are fixed for an initial period such as one year, three years, five years, or seven years. After the initial fixed period, the interest rate can change every year. For example, one of our most popular adjustable rate mortgages is a five-year ARM. The interest rate will not change for the first five years (the initial adjustment period) but can change every year after the first five years.
An adjustable rate mortgage, or an “ARM” as they are commonly called, is a loan type that offers a lower initial interest rate than most fixed rate loans. The tradeoff is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.
Considering the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It’s a tradeoff. You get a lower rate with an ARM in exchange for assuming more risk.
For many people in a variety of situations, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for three to five years.
Here’s some detailed information explaining how ARM’s work.
