3 Adjustable Rate Mortgage Terms You Should Know
Are you shopping for a new home or refinancing your existing mortgage? If so, you’ve probably heard of adjustable rate mortgages (ARMs). These mortgages come with a range of terms that can be confusing to understand. Knowing the key adjustable rate mortgage terms is essential if you’re considering an ARM – especially since it can affect your monthly payment and interest rate. In this article, we’ll go over three adjustable-rate mortgage terms you should know before signing on the dotted line.
1. Adjustment-Rate Mortgage Period
An adjustable-rate mortgage period is the length of time in which your interest rate and monthly payments remain fixed. After that period ends, your interest rate and monthly payments can change. Common ARM periods include 3/1, 5/1, 7/1, and 10/1 ARMs – the first number is the length of time your interest rate and payment will remain fixed; the second number is how often it can be adjusted after that. This means a 5/1 ARM would stay the same for its first five years, then can be adjusted annually.
2. Index
An index is a financial benchmark used to determine changes in an adjustable-rate mortgage. It’s usually based on a variety of economic indicators, such as the national average mortgage rate or the cost of consumer goods. If your ARM is linked to an index, your interest rate will fluctuate accordingly and indicate when it’s time to refinance.
3. ARM Margin
The ARM margin is the percentage points that are added to the index in order to calculate your new interest rate during adjustment periods. This figure is set by the lender and remains unchanged throughout the lifetime of your loan. For example, if your index is 3% and your margin is 2%, your interest rate would be 5%. Also, keep in mind that the index may change, but your margin will stay the same.
The Bottom Line
Now you know the 3 adjustable-rate mortgage terms you should know before applying for an ARM. Understanding these terms can help you make a more informed decision and save money in the long run. Be sure to do your research and check in with a reputable mortgage finance company in Toronto to ensure you’re getting the best deal for your needs. This way, you’ll be able to make the most of your adjustable-rate mortgage. Thanks for reading.
