ARM is the abbreviation for an adjustable rate mortgage. This type of home mortgage starts at a rate that may be lower than a fixed rate loan. After a certain time, that could be 6 months to 10 years, the loan is reset. The adjusted rate is an index, such as the Monthly Treasury Average (MTA), plus an additional amount called a margin. The rate will re-adjust according to your mortgage terms.
People select this type of a loan for various reasons. The spread between a fixed and variable rate changes over time. When a fixed rate loan would cost far more than a variable rate loan, customers are more likely to want the variable rate program. For example if a variable rate was 5% compared to 6.75% for a fixed rate. Right now the spread is small, making the fixed rate more attractive. If you think you are going to move or refinance in a few years the variable rate could have an advantage. For example if you are going to move or refi in 5 years you could get a 5/30 ARM. The first number (5) would be how long the starting lower rate is guaranteed for. Another reason to get an ARM is that you may qualify for a larger loan on the ARM because of the lower start rate. In some cases it is the only way to get a large enough loan for the home that the customer wants. During times when rates are very high a customer might want an ARM if they think rates will drop. Falling rates would result in the ARM adjusting downward. Another case where customers get an ARM is for some sub-prime loans. Some lenders that make loans for consumers with low credit scores only offer ARM loans.
As a mortgage broker I currently suggest a fixed rate loan for most customers. This is because there is only a small rate advantage for the ARM at this time. In addition with an ARM loan there is uncertainty about the future payment. Some consumers that got an ARM a few years ago are now facing payment shock as their payment rises. In some cases this can even be a factor that contributes to the customer losing their home. If you do go with an ARM make sure you understand how much your payments will be if the rate increases as much as possible. Many ARM mortgages also have a penalty if you payoff or refinance the loan in the first few years. This is another item to be sure you understand before committing to an ARM loan. Texas residents can call me at Texas Capital Mortgage for additional information at 281-537-7800.
This article is by Glenn Lamb, a mortgage broker and owner of Texas Capital Mortgage - http://texas-capital-mortgage.com and the Lamb Insurance Agency, Auto, Home, Life, and Business Insurance for Texas - http://www.farmersagent.com/glamb - Texas Health Insurance - http://health-insurance-for-texas.com