How to Use an ARM Loan | New American Funding
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ARM loans were once the most popular home loans available, but many buyers have become nervous about variable rates in the last few years. But while ARM loans may not be the best bet for everyone, they do offer a lot of benefits for the right buyers. Buyers who want payment flexibility during the early years of a mortgage - like newlyweds or even property investors, can see real benefits from an adjustable rate mortgage, if they utilize it properly. A loan agent from New American Funding can help you decide if an ARM loan is right for you!
Transcript of How to Use an ARM Loan | New American Funding
State Licensing Information.
What is an ARM Loan?
Some people may joke that a new home costs an arm and a leg, but an ARM loan is actually a great tool to help make a home more affordable. ARM stands for Adjustable-Rate Mortgage, and it can provide a lot of value to buyers in certain situations. But if you’re thinking of choosing an ARM loan, there is a lot to consider. While fixed-rate mortgages are fairly straightforward (you just need to consider the interest rate and the loan term), ARM loans come with a few variables you should be aware of.
State Licensing Information.
What is an ARM Loan?
Simply put, an ARM loan has an introductory interest rate that lasts for a designated period of time and then will vary annually. Like common fixed-rate mortgages, most ARM loans have a thirty-year term, but you’ll want to take note of the introductory period and the rate adjustment period. When searching for loans, you’ll see listings like 5/1 ARM, or 7/1 ARM. The first number represents the length of the intro period and the second signals how often the rate adjusts after the intro. • 10/1 ARM: Rate is set for 10 years and adjusts annually for the next 20 years. • 7/1 ARM: Rate is set for 7 years and adjusts annually for the next 23 years.
State Licensing Information.
The Intro Period
ARM loans were once the most popular mortgages available, but fell out of fashion after the housing bubble in 2009. Although many buyers still avoid the ARM loan, it can provide some serious benefits. For example, a 5/1 ARM with an initial 3% interest rate would offer buyers a lot of flexibility during the early years of home ownership. Like a conventional fixed-rate mortgage, a 5/1 ARM loan is geared toward borrowers with good credit, substantial down payments and lower income-to-debt ratios. Since it provides flexibility with payments, an ARM loan is often a perfect offering for first-time homebuyer programs, but next you need to consider how your rates will vary over time.
State Licensing Information.
How Do Rates Adjust?
Once the introductory period ends, it’s vital to understand how your rates will adjust at each adjustment period. There are two components to this rate adjustment: the index and the margin. Index: The index is a benchmark variable rate based upon a specific public index like a US Treasury Bill (T-Bill) or LIBOR rates. T-Bill rates have risen recently but are still historically low at 0.3% Margin: The margin is a fixed rate for the life of the loan, and it can usually be negotiated with your lender. The typical margin is 2.5% Now that you know both, you simply add the variable Indexed Rate to the Margin and you’ll know your adjusted rate. So if your Margin is 2.5% and the Index is 2%, you’ll be paying 4.5% after your introductory period.
State Licensing Information.
How Do Rates Adjust?
Since rates are public, you should never be surprised by a rate increase – but it can still be shocking. Lenders know that it’s impossible to guess where rates will be in the future, so ARM loans include protections to help homeowners adjust to their new rates. Rate caps place limits on how far rates can increase. Initial Cap: Limits how much your interest rate can increase at the first adjustment. Periodic Cap: Limits the amounts your rate can increase during any period. Lifetime Cap: Determines the highest possible rate on your loan, even if your margin + index rises above it.
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When To Use an ARM
As mentioned previously, ARM loans can be great for first-time homebuyers, but they also provide value in many other buying situations. • If you expect to sell a house within 5 years, an ARM’s low interest can
save thousands of dollars. • ARM loans can help finance investment properties where buyers are
looking to renovate and either rent or re-sell quickly. • They are ideal for people with multiple properties since ARMs offer
lower payments and lower interest rates.
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ARM or Fixed-Rate Mortgage?
There are plenty of loan options out there, so it’s important to do your homework before committing to any loan. For disciplined homebuyers, an ARM can be a great way to save money and prepare for higher rates or to sell a house in the near future. However, fixed-rate loans offer security and stability through fixed payments for the life of the loan. Your first step should be to contact New American Funding and talk with a loan agent to determine which loan is right for you and your family.
State Licensing Information.
How to Use an ARM Loan
Learn more about your loan options at
www.NewAmericanFunding.com
