Lower rates & monthly payments early in the loan term allow you to qualify for more.
The initial rate on an ARM is lower than on a fixed-rate mortgage which allows you to purchase a more expensive home than you would normally qualify for.
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Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan’s term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed-rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable-rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds (COFI).
When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called “caps”. Suppose you had a “3/1 ARM” with an initial cap of 2%, a lifetime cap of 6%, and an initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.
Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable-rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.
Hybrid ARMs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM)
Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7, or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable-rate for 23 years.
The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that’s fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes.
Homeowners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to live long in their homes. By getting a lower rate and lower monthly payments than with a 30- or 15-year loan, they can break even more quickly on refinancing costs, such as title insurance and the appraisal fee. Since the monthly payment will be lower, borrowers can make extra payments and pay off the loan early, saving thousands during the years they have the loan.
How we help you
We can find the loan that’s right for you.
Alibel Mortgage simplifies the process of getting a new home loan or refinancing your current mortgage loan so you don’t have to stress about it. We have your best interests in mind at all times.
- We shop around for you for the best loans without having to waste your time.
- We work directly with lenders to make the process as simple and as fast as possible.
- You can start looking at houses with confidence after prequalifying with Alibel Mortgage.
Helping you buy a home or refinance your current loan
Reviews for Alibel Mortgage
"Ashley exceeded my wife and I's expectations and made the entire mortgage process as easy and stress free as possible. I had been working with several lenders to secure a mortgage and Ashley was the obvious choice as she is professional and knowledgeable and makes the extra effort to take care of her clients. I used the VA loan, which I hear can be confusing like most government programs, but Ashley knew all the ins and outs of the VA loan. We ended up closing on time with a lower interest rate than expected and much lower than competitors. My wife and I couldn't be more satisfied. Do yourself and favor and let Ashley help you with your next home purchase."
– Joseph F.
"We just bought our first home thanks to Ashley! After we ran into some serious problems with our other lender just two business days before closing, we were referred to Ashley. I swear, she did more in 5 hours than our other lender did in the whole month we were with them. As an added bonus, she somehow got us a lower interest rate and closing costs than what we were offered with the other lender. Ashley is hardworking and was dedicated to making the home loan process as stress free as possible for us. Glad we had her on our team at the closing table."
– Karen W.
"Ashley was able to keep her fees low and found me the best rate available.. she found the lender that was right for me and was a stickler for detail. She was willing to go the extra mile by making trips to my house and followed all the way through and was at my closing to make sure everything went the right way. She stayed in touch the whole process and i never felt like i was forgotten about. She was available at all times and i could not ask for a more professional and better person to handle this loan for me. I will ask for her anytime i need something done."
– Ben S.