Have you ever wondered how an Adjustable Rate Mortgage (ARM) actually works?
Despite rumors, ARMs are not adjustable “whenever the bank wants.” Often, ARMs are permitted to be adjusted every six months, but the bank may not always follow such schedule. The terms are specified in the contract and it is very important to read those details before utilizing any loan.
Confused by the terms and figures?
The ARM loan will usually have two figures separated by a backslash. For example: 3/27.
The first number (3) is the number of years that the ARM will remain fixed at the starting interest rate and is sometimes called a Teaser Rate. This is the figure that is very attractive to home buyers because the rate is usually very low. It will inflate the customer’s buying power at first glance. During the subprime boom, many of these loans were written under the promise that the rate could go down. It is likely that the buyer’s mortgage payments will not ever go below the teaser rate once the loan begins to adjust. Some ARMs are adjustable right out of the gate. Those types will specify that detail but usually there is some sort of teaser rate fixed for a period of years.
The second number (27) is the number of years that the mortgage will be adjustable under the terms of the contract. During the period where the rate is adjustable, the interest rate may fluctuate considerably. What this means for the homeowner is that the mortgage payments may also fluctuate considerably which in turn affects available cash for the month.
