1.Tied to an Index
Standard ARMs are mortgages in which the interest rate is tied to an economic index. This means that the interest rate, along with your payments, can be increased or decreased as the index changes. The index that affects standard ARMs is a guide that experts refer to for measurement of the changes in the interest rate. There are a number of indexes that have an impact on standard ARMs. They can include the one, three, and five-year Treasury securities, plus others. Standard ARMs are each connected to one specific index.
2. Margin
Another aspect of standard ARMs that impact your payment is the margin, which is basically the mortgage lenders markup. The margin associated with standard ARMs includes the cost of lending you the money plus the profit the company wants to make from your loan. When the margin is added to the index, you will get your interest rate for standard ARMs.
3. Adjustment Period
The adjustment period is the time between possible interest adjustments on standard ARMs. Often standard ARMs have numbers associated with them like 2-1, 1-1, or 5-1. The first number in standard ARMs tells you how many years after you sign the papers that your interest rate will remain the same, and the second number tells you how long you have between potential interest rate adjustments after the initial period. For instance if your standard ARM is a 3-1, your interest rate will remain the same for three years after signing the papers, then it can be adjusted annually.
4. Look at the whole picture...
Knowing how standard ARMs are calculated is only one factor in determining if standard ARMs are right for you. You will also need to ask yourself the right questions. Many people avoid standard ARMs, because they only look at the fact that there is a potential for a rate increase. However, standard ARMs also offer you a lower initial rate than fixed rate mortgages. This lower initial rate with standard ARMs may help you qualify for a larger mortgage loan.
5. Short term?
Another reason to consider standard ARMs is if you are not planning to stay in your home for more than a few years. The potential for rate increases with standard ARMs will not have as much of an impact if you are going to sell your home in two or three years. Also, if you work in a job where you have the potential for your income to increase, you could find that the increase in your standard ARMs may be covered by your raises. Finally, there are some standard ARMs that can later be converted into fixed rate mortgages, though conversion fees can often negate any savings in the initially lower payment.
As you shop around for standard ARMs, you may want to look at what indexes the lending company uses along with discounted rates and buydowns. If you are also worried about how much your payments can fluctuate with standard ARMs, you may want to look for mortgage loans that have periodic or overall interest rate caps or payment caps. Make sure you discuss all your options with your potential lender to be sure that standard ARMs work best for your financial situation.
