The rates on adjustable mortgage are short-term. Short term rates are usually lower than fixed-rate mortgages resulting in lower monthly payments for the fixed period of the ARM. AS a result, ARMs allow a home buyers to purchase a more expensive home. ARM are also a great loan option for short-term real estate investments.
Market conditions can affect a number of different financial factors, which, cause the interest rates on an adjustable rate mortgage to rise and fall. Different adjustable rate mortgages use different indexes to establish the rate of the adjustable rate mortgages like the 11th District Cost of Funds Index (COFI), the London Interbank Offered Rate (LIBOR), the 12-month Treasury Average Index (MTA), the Constant Maturity Treasury (CMT) and the National Average Contract Mortgage Rate.
Adjustable-rate mortgages (ARMs), have monthly payments that start lower that a fixed-rate mortgage but can move up and down as interest rates fluctuate. ARMs traditionally have an fixed-rate period of either 3, 5, or 7 years in which the rate doesn’t change. This is followed by a longer period where the rate may change at preset intervals.
The rate for an ARM adjusts after a given time after the fixed rate period ends. It’s commonly known as know as the “adjustment period.” The most common adjustment period for an ARM loan is 1 year. This means that once a year, the loan rate adjusts to the index + margin.