A variable-rate mortgage, or adjustable-rate mortgage (ARM), is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. There are many different types of ARM mortgages including 1-year, 3/1, 5/1, 7/1 and 10/1 with almost every ARM loan being amortized over a 30 year period.
Adjustable Rate Mortgages in Boston, Worcester, and Peabody
Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).
Mortgage Rates of ARMs in MA
An adjustable-rate mortgage is a home loan with an interest rate that varies according to specific benchmarks, which are predetermined at the outset of the mortgage. What this means is that, throughout the course of your mortgage, you’ll pay a different interest rate at different stages. It won’t just change on a daily basis, as the benchmarks will be laid out in advance. You may have also heard of adjustable rate mortgages being referred to as variable-rate mortgages or floating-rate mortgages.
Adjustable-rate mortgages have a number of advantages, but some disadvantages as well. One of the advantages is that they may have lower initial interest rates than fixed-rate mortgages, which may result in lower monthly mortgage payments. Because the lower payments may be more affordable, qualifying for an adjustable rate loan may be easier. Adjustable-rate mortgage lenders also provide more flexibility than fixed-rate loans, and they allow buyers to expect future financial situations, including in economic environments where interest rates are falling.
Of course, if adjustable-rate mortgages only had upside, nobody would ever seek a fixed-rate mortgage. There are downsides as well. The biggest downside with adjustable rate mortgages is called “payment shock.” What this means is that monthly payments can rise quickly when the benchmark for the interest rate change comes, which leads to some unpredictability. Adjustable-rate mortgages can also be a little bit more confusing for the buyer, as there are more options and complexities than their fixed-rate counterparts. If you’re looking to borrow on an adjustable rate basis, you should ensure that you have professional mortgage loan officers like us at your side to help you navigate the mortgage application process.
