Welcome to our new series, Real vocabulary!
Each week I will be helping to define and break down a Real Estate or Mortgage term, so watch this space for the rest of the alphabet!
What is an ARM?
No, not the one I use daily to do amazing tasks like wash the dishes, open my car door or type this blog. In the mortgage world, it seems easier to use acronyms for everything in order to streamline the mortgage communication process. This actually does come in handy for the lenders, processors and underwriters to communicate more efficiently but it seems to leave the general public in a daze. Its not like the entire loan process is part of our day to day routine, so yes, please throw in about 20 new words that I can now sit down and study while I eat dinner?
All in all, an ARM, also know as an Adjustable Rate Mortgage is pretty straight forward; it is a type of mortgage where the interest rate fluctuates over time. I bet you are wondering “why would I want that? How could that possibly benefit me?”. Its typically because the rate starts lower making it extra appealing to a home buyer who is already feeling the financial stress that can come with purchasing a new home. BUT, buyer beware!! CNBC journalist Sarah O’Brian gives her insight in a recent article regarding interest rates rising.
"You need to know the exact terms of the ARM, not just the interest rate at the beginning of the loan," said Stephen Rinaldi, manager at Pando Mortgage in Media, Pennsylvania. "Don't buy into an ARM thinking the rate will stay low forever."
With an ARM, the initial interest rate — which generally is lower than that on a traditional 30-year fixed mortgage — is only fixed for a set amount of time.
After that, the rate could go up or down, or remain unchanged. That uncertainty makes an ARM a riskier proposition than a fixed-rate mortgage. This holds true whether you use an ARM to purchase a home or to refinance a loan on a home you already own.
The ARM adjustment is based on a widely used interest rate index, along with the specific terms of your loan (more about that further below). Commonly used benchmarks include the one-year Libor, which stands for the London Interbank Offered Rate, and the weekly yield on the one-year Treasury bill.
If you have questions about any of this information or need a recommendation for a mortgage professional, please contact me!