An adjustable rate mortgage (ARM) has an interest rate that fluctuates periodically. This is in contrast to a fixed rate mortgage, which always has the same interest rate.
Every ARM has basic components:
An interest rate cap
An initial interest rate
An ARM’s interest rate is tied to one of many economic indices, some examples of which are the 1-year constant maturity Treasury security, the Cost of Funds Index, or the London Interbank Offered Rate. Different indices move at different rates so know the characteristics of the index used for your ARM.
The interest rate for your ARM will be calculated by adding a margin to the interest rate from the index. The margin is basically the markup charged by the lender that allows them to make a profit off of your loan, such as adding 2% to the index, where the 2% is the margin. The margin of your loan usually does not fluctuate.
The Adjustment Period
The Adjustment Period controls when and how often your interest rate changes. For example, if your ARM has an adjustment period of 1 year, your interest rate will be subject to change at the end of each year and your monthly mortgage payment will be recalculated to reflect this change.
The Interest Rate Cap
Interest rate caps are built into the loan to protect the borrower from drastic interest rate fluctuations. The caps limit how much the interest rate or monthly payment can change at the end of each adjustment period. An ARM can also have a cap for the life of the loan. For example, during the life of a loan, the interest rate can only be increased by 5%.
The Initial Interest Rate
The Initial Interest Rate is the interest rate that you start with at the beginning of your loan period. The length of time your loan stays at this rate is built into the loan. For example, you may stay at the initial interest rate for 1 year, 5 years, or another length of time depending on your specific mortgage. This type of ARM is generally referred to as a Hybrid ARM. The initial interest rate for an adjustable rate mortgage is generally lower than that of a fixed rate mortgage.
David L. Britt, MBA
9393 W 110th St Suite 170
Overland Park, KS 66210
We have only the highest praise and recommendation for David. In all transactions David was organized, thorough, and personable. He offered us an objective viewpoint on each house we toured, thereby helping us with our decisions. We found him to be knowledgeable about aspects of realty that surpassed just the legalities of buying and selling properties, and furthermore we were consistently impressed by his willingness to research questions he couldn't answer right away. His vast knowledge of market analysis, contractors, financial options, legal issues, etc. showcases that he is best in the industry. Through our journey, we watched David educate the other realtors while they provided misinformation or demonstrated a lack of experience. He was always expedient in returning our calls, searching for properties, and setting up tours. We looked at many houses and David always had appointments scheduled, maximizing the number of houses to view by the next day.
Then, when we ran into some trouble with our mortgage lender and final inspections, David was instrumental at helping us navigate through the mess so that we could close on our home. His patience with us and our lack of understanding was beyond that of realtor, but more resembling a friend.
In summary, we had a great experience utilizing David for the purchase of our new home. In today's world, customer service is very important and we feel David is the epitome of delivering customer service that would exceed your expectations. We recommend you find out for yourself. We wouldn’t hesitate to recommend David Britt to any person who is looking to buy or sell a home, as well as seek his service in any of our future real estate transactions.
B and S Coffman - Olathe, KS
David Britt is a man of his word; honorable, kind, and very professional. When I called him to ask his help and advice on the purchase of a new home, he made himself available in a moment's notice. As we went through the process of finding it, making an offer, closing the deal, and finally signing all the paperwork, David was a very helpful "partner." He made it look easy and feel comfortable. My daughter and her husband needed a real estate agent too. I recommended they call David. I am very protective of her--and not many sales people would have my stamp of approval--a prerequisite for working with "my baby." David earned that stamp and represented them in the purchase of their new home too! J Cutler - Olathe, KS