ARMs – Adjustable Rate Mortgages Explained,

by Joel Nelson, Kalamazoo Area Real Estate Expert

The term ARM is us used by mortgage and real estate professionals when referring to an "adjustable rate mortgage".

  There are many forms of ARMs available to buyers of Kalamazoo homes in the area, although their popularity and availability has diminshed since the mortgage crisis. Because of the readjustment of rates on ARMs, combined with the economic downturn, many home owners were unable to afford the payments

Simply put, an ARM is a loan that has a rate of interest that is fixed for a certain period of time, then adjusts to a new rate of interest for another period of time. Most ARM's adjust annually, after the initial period of time. This will continue until the loan is paid off. The term of most mortgages is either 15 or 30 years (although other terms do exist, and can be as little as 10 years or less, and as high as 40 years.)  Often the initial rate, in effect for a short period of time after home purchase, was very low.  Often, this allowed a home buyer the opportunity to "overspend" their income.  That wasn't a huge problem when home prices were continuously rising. 

 ARMs come in many shapes and sizes. The most traditional ARM is the 5/1 or the 10/1 year ARM.  The 5 or 10 refers to the initial period of “fixed” interest rate. For example, a 10 year ARM mortgage with a 30 year term would be called a 10/1 ARM. The interest rate would be fixed for the first 10 years and then adjust annually for the remaining 20 years until the loan is paid off.

When reading any ARM product that is presented with a slash, ie: 3/1, 5/1, 10/1 etc., the first number is the initial period, and the second number is the frequency of adjustment (in most cases, annually.) You'll notice the smaller the first number, the lower the rate usually is.  The ARM adjusts based on an index plus an agreed upon premium. The most common index used is the one year treasury note rate. Another popular index is the LIBOR rate. This is a European index based out of London. It is popular with many Jumbo loans and is a favorite of the financial sector borrowers in New York, Chicago, and Los Angeles. Another important item to look at with an ARM is the ceiling, floor, and lifetime ceiling. The most common ceiling is 2% per adjustment and 6% lifetime. The floor varies from lender to lender. Recently, many lenders have changed the game and now use a 5% max ceiling per adjustment, and no ceiling.

ARMs are no longer anywhere near as common as they were just a few years ago, but they can be useful to buyers of Kalamazoo homes if, for example, they are certain they will not be living and owning the property for a long period of time.

The historically low rates on fixed rate mortgages have taken over the vast majority of mortgages on Kalamazoo homes.

If you would like more detailed information about mortgages or mortgage rates for buying Kalamazoo homes,  feel free to contact me.Information is also available at http://HomesofSWMichigan.com

There is a lot of free information available to you about buying, selling or investing in Kalamazoo homes.. For complete information about the Kalamazoo real estate market including current Kalamazoo homes for sale, property values and more please visit the most complete website on line dedicated to everything Kalamazoo real estate at http://HomesofSWMichigan.com  Please feel free to contact me with any of your real estate or mortgage related questions and I will be more than glad to answer your questions. Call me on my cell at 269 760-1558 or email me at JoelNelson@KW.com.