Adjustable-Rate Mortgages. An adjustable-rate mortgage is a loan on which the periodic contractual interest rate can change over the life of the loan. The rate is reset periodically to a fixed spread (called the margin) over a benchmark or reference rate.
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October 1, 2007
Treasury Yield Curve
Example of 1 Year ARM (No Caps)
Note, each payment is calculated based on the Loan Rate
Shown above, the remaining balance due after amortization
and the remaining term=30-t
Calculating the Rate on a Capped ARM
Lifetime Cap=5% over original loan rate
Periodic Cap=+/- 2%
Effect of Teaser Rate on ARM Adjustment
Say the Initial Rate is set ay 6%--2.85% below fully-indexed rate.
ARM Amortization if Rates Stay Constant
ARM Amortization if Rates Rise
ARM Amortization if Rates Fall
Negative Amortization from a 15% Payment Cap
Pay Option Loans
From 9/16/07 Hartford Courant Rates Page
Recent ARM Share Data from Freddie Mac
Freddie’s survey focuses exclusively on
conventional conforming mortgages and so
provides a lower estimate of ARM share
than you would find if you included jumbo
& subprime sectors
HSH Checklist for When You Should Choose an ARM
Is an ARM Right for You?
If you haven't considered an ARM before, you certainly should. The short checklist below will help you to determine if some form of ARM might be for you. Just check any that apply:
My job has required more than one transfer in the past ten years I bought / am buying a "starter home" I'm planning on having more children / occupants than my home has bedrooms I'm single, young and buying a condo or apartment I'm a potential retiree in the next ten years I think rates will fall in the next few years I have trouble qualifying for a fixed rate mortgage at today's rates I expect to move or expand my home within seven years I'm getting a jumbo mortgage I have elderly relatives whose care I may be responsible for soon
A checkmark on at least some of these questions indicates that you probably won't be holding a 30-year FRM for anywhere near 30 years. You may expand your home, move, refinance, retire and move or want more productive cash flow. All of these argue in favor of some form of ARM.