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798 Rays Road #102 Stone
Mountain, GA 30083 Bus. 404.298.9200 Fax. 404.298.9377 |
Several adjustable rate mortgages are available to
homeowners and they include 6-Month Certificate of Deposit
ARM, 1-Year Treasury Spot ARM, 6-Month Treasury Average ARM,
and the 12-Month Treasury Average ARM. An ARM that reacts
quickly to the market will allow the borrower to benefit
from falling interest rates. An ARM that lags the market
will allow the borrower to take advantage of lower rates
when rates being to increase.
There are several aspects of ARMs that impact interest rates
including the index, margin, interim caps, and payment caps.
The index of an ARM is the financial instrument that the
loan is linked to and indexes move up and down with the
market. The margin is added to the index to determine the
interest that the borrower will pay. Caps, such as the
interim cap, protect borrowers against rising interest
rates. Payment caps, on the other hand, place a maximum on
the amount a borrower must pay. This type of cap also
protects against payment shock associated with rising
interest rates.
The index of an ARM is the financial instrument that the
loan is "tied" to, or adjusted to. The most common indices,
or, indexes are the 1-Year Treasury Security, LIBOR (London
Interbank Offered Rate), Prime, 6-Month Certificate of
Deposit (CD) and the 11th District Cost of Funds (COFI).
Each of these indices move up or down based on conditions of
the financial markets.
The margin is one of the most important aspects of ARMs
because it is added to the index to determine the interest
rate that you pay. The margin added to the index is known as
the fully indexed rate. As an example if the current index
value is 5.50% and your loan has a margin of 2.5%, your
fully indexed rate is 8.00%. Margins on loans range from
1.75% to 3.5% depending on the index and the amount financed
in relation to the property value.
All adjustable rate loans carry interim caps. Many ARMs have
interest rate caps of six-months or a year. There are loans
that have interest rate caps of three years. Interest rate
caps are beneficial in rising interest rate markets, but can
also keep your interest rate higher than the fully indexed
rate if rates are falling rapidly.
Some loans have payment caps instead of interest rate caps.
These loans reduce payment shock in a rising interest rate
market, but can also lead to deferred interest or "negative
amortization". These loans generally cap your annual payment
increases to 7.5% of the previous payment.
Almost all ARMs have a maximum interest rate or lifetime
interest rate cap. The lifetime cap varies from company to
company and loan to loan. Loans with low lifetime caps
usually have higher margins, and the reverse is also true.
Those loans that carry low margins often have higher
lifetime caps.
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