Why is ARM such a scary 4 letter word in the mortgage industry that makes everyone run for the hills? The common belief is that ARM's, along with Interest only products sunk the market. This is not true by any means. As a matter of fact, by knowing your margins, caps and index’s for certain situations these products work great!

Do you have or need any of the following?

• Adjustable income?

• Short term goals

• Need additional monthly cash relief 

• Need lower rate to qualify for a refinance  

ARM’s are all about risks and managing those risks.

If you were to refinance today into a 5/1 ARM:

• 3.5% Note Rate
• 5% Lifetime Cap
• 2% Annual cap
• 2.25% Margin

The REWARD side:

1. If you have variable income and have a low income month you could have that relief in payment…Balance after 5 years = $224,242 ($5,733 less than the 30 year)

2. OR if you have a high income month, you have the option to send in additional principle, and then MORE of the money goes to principle (even in a fixed income scenario!).  Assuming you send the difference in the payment between the 30 and the 5/1. You pay an additional $239/ month, and your balance = $208,596 ($21,379 less than your 30 year)

The RISK Side:

Let’s say you let it adjust, which is a move frequently not played. If the lifetime cap is 5% from original rate, then let’s say: 

Worst case scenario: The rate adjusts the entire 5%in the first adjustment and now you’re at 8.5% (highly unlikely). If it were the stay at that worst case scenario for the next 5 yrs. then for first 5 yrs you were at 3.5% and last 5 years you were at 8.5% meaning worst case scenario your average rate was 6% over ten years, with the opportunity to pay a lot more to principle over those first 5 years. Your balance at the end of 10 year is $207,834, which is not that far off the 30 year balance, and you were able to pay it down rapidly over the 1st 5 years. AND THAT JUST THE WOST CASE!! 

Best case scenario: You start at 3.5% and the loan drops to 2.5% after 5 yrs (Also not very likely, but has been happening). Knowing that the rate may change every year at this point, but not by more than 2%, then you know you will go from 3.5%, to 2.5% (6th year), to 4.5% (7th year) to 6.5% (8th year) and 8.5% (9th year).  Your 10 year balance is around $201,101 which, once again puts you in front of the 30 year term.   

REALITY: With something in the middle being realistic, as you can see with these numbers, ARM’s (when properly understood and used), can be a tremendous advantage to the consumer.   

What is a ARM loan program?

This loan program is an adjustable rate mortgage with a low initial monthly payment for One, Three, five, Seven, or Ten Years years.

Its low introductory start-rate allows you to make very low initial mortgage payments and low qualifying rates enable you to qualify for more home.

In year six, the payment will then be calculated using the index rate plus the margin rate, and amortized over the remaining term of the loan. On a thirty-year loan, the remaining term is Thirty years minus the ARM term's years.  For Example:  On a 5/1 ARM, you are fixed for 5 years and then your rate will adjust to pay off in the remaining 25 years. 

The note rate is the interest rate the bank will charge you each month.

Index plus Margin
The index is the base rate used to determine your interest rate. Most people are familiar with the Prime rate, T-bill or Cofi.  ARM programs are is usually based on one of the following indexes:

• London InterBank Offered Rate (LIBOR)
• 11th District Cost Of Funds Index (Treasury)

The Margin is the number of percentage points (for example, 2.75) the lender adds to the index rate to calculate the ARM interest rate, or note rate, at each adjustment. The margin is fixed at the time the loan is funded.

The interest rate you will be charged is the index rate plus the margin.

Compare advantages of other Loan Programs

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