All About
Adjustable Rate Mortgages
Adjustable Rate Mortgages, or ARMs, are a popular option for many people. Click the button below to apply and see if an ARM is right for you, or read on and learn all about how they work.
ADJUSTABLE RATE MORTGAGES
What Is An ARM & How Does It Work?
Fixed rate mortgages have an interest rate that remains the same for the life of the loan, while the interest rate on an ARM will change throughout. Initially, the interest rate of an ARM is lower than a fixed rate mortgage, making an ARM a good option for many planning to own their home only for a few years.
The components of an ARM are as follows: (A) an index, (B) a margin, (C) an interest rate cap structure, and (D) an initial interest rate period. After the initial interest rate period ends, adding the index to the margin is how the new interest rate is calculated by adding a margin to the index. Your lender will disclose the margin at time of loan application (margins may vary from lender to lender, so it's a good idea to shop around for a low margin). As the index figure moves up or down, your interest rate will be adjusted accordingly. Acceptable index options on FHA insured ARM loan transactions are (A) the Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); or (B) the 1-year London Interbank Offered Rate (LIBOR). Increases or decreases in the interest rate will be limited by the interest rate cap structure of your loan.
What this interest rate cap structure does is protect from large interest rate swings. The two types of caps are as follows: (A) annual, and (B) life-of-the-loan. What the annual cap does is restrict the amount your interest rate can change in any given year. The life-of-the-loan cap limits the minimum and maximum possible interest rate. The Federal Housing Administration offers a standard 1-year ARM as well as four "hybrid" ARM products. What is a hybrid ARM you ask? Well, a Hybrid ARM offers an initial interest rate which doesn't change for the first 3-, 5-, 7-, or 10 years. After that initial period, your interest rate will adjust annually. Here are the different interest rate cap structures for the various ARM products:
- 1- and 3-year ARMs may increase by one percentage point annually after the initial fixed interest rate period, and five percentage points over the life of the Mortgage.
- 5-year ARMs may either allow for increases of one percentage point annually, and five percentage points over the life of the Mortgage; or increases of two percentage points annually, and six points over the life of the Mortgage.
- 7- and 10-year ARMs may only increase by two percentage points annually after the initial fixed interest rate period, and six percentage points over the life of the Mortgage.
About Coastal Funding
In business for over 20 years, Coastal Funding Corporation is known for our determination to acquire as many lending partners as possible. We understand not every loan program fits every person, and on top of that, every lender has their own specific requirements, meaning the more options we have at our disposal to match you up with, the more likely you are to find not just a loan, but the right loan.