ARM Loan Guide: Everything You Need to Know About ARM Loans

Perhaps you already know that acquiring a home comes with a lot of hassle for many people, especially the payment. Thus, they turn to different low-rate mortgage plans and loans. In this light, a very reliable and low-rate loan to settle your mortgage, buy a new home or even refinance your mortgage is the ARM loan. It is fast becoming the home prospector’s bridge to achieving their dreams. Would you like to experience this transition too? Then, read more about this loan here. 

What is an ARM Loan?

Also called a variable-rate mortgage or a floating mortgage, an ARM loan is an adjustable-rate mortgage loan. As the name implies, the loan’s interest rate can change periodically. Usually, the rate starts off low at the introductory stage, which often falls within three, five, seven, or ten years. And once that period expires, a new interest rate kicks in. And this new rate is an adjustment to the previous one according to an index. So, if your goal is to get the loan with the lowest rate, you should give an ARM loan a shot. It just might be what you need. 

When the initial period is over, the interest rate for ARMs is reset. This reset is effected based on the set index, with an ARM margin spread. So, if the index has considerably decreased compared to when you first got the loan, your mortgage payment also reduces. And the same goes for the interest rate on the loan. 

Types of Adjustable-Rate Mortgage

1. Hybrid ARM

This is a mix of adjustable and fixed rates. Usually, these kinds of loans have a low rate at first. But this rate later begins to float at a set time. This type of ARM is expressed using two numbers. And the numbers represent the duration of the two periods in the loan – first, the fixed term, then the adjustable-rate period. Hence, a 5/1 ARM would then represent a fixed rate for the first five years, followed by a variable rate that adjusts yearly. 

2. Interest-only (I-O) ARM

For this type of ARM loan, you get to pay just the interest on the mortgage for a period of time (usually 3-10 years). After, you will be required to pay both the interest and the principal on the loan. 

3. Payment-option ARM

This ARM type avails you of several payment options. Here, you could get to pay a minimum amount that does not even cover the interest. Or even just paying the interest on the loan. 

How Do ARM Loans Work?

Actually, what should be your major decision influencer in the ARM loan should be the interest cap. This is the limit to which the interest can rise. And there are different interest caps. They include:

1. First adjusted interest rate cap: This is the maximum amount the rate can rise to when adjusted for the first time.
2. Subsequent adjusted interest rate cap: This is the maximum amount the rate can rise to at each adjustment after the first time.
3. Lifetime rate cap: This is the maximum amount the rate can go up to during the entire loan term.

To wrap up, if you are looking to settle down as a homeowner, the ARM loan benefits you. Compare different cap rates based on your offers, and pick the one that works for you. Then, set out on your journey to being the next homeowner!