An adjustable rate mortgage, or ARM, typically has an interest rate that is below the current market rate to begin with. Because the loan is adjustable, the interest rate may increase over time however the low introductory rate can be in place anywhere from 1 month to 10 years from the loan start date. Introductory rates ARMs can be as low as 5% less than current market rates. Sammamish Mortgage can help you learn more about Seattle introductory rate ARMs and whether or not this type of loan is best for you.

Index
Financial market conditions can influence mortgage rates and the index is the tool by which ARMs are adjusted accordingly. There are three major indices that ARM loans are “tied” to: LIBOR (London Interbank Offered Rate) which is the 1 year treasury security, CD (Certificate of Deposit) and COFI (11th District Cost of Funds).

Margin
The margin is what is added to the loan rate to give your fully indexed rate. If the index value on a loan is 5% and the margin is 2.8% then the fully indexed rate for the loan will be 7.8%. Loan margins range anywhere from 1.75% to 3.5% and are determined by the value of the property as well as the amount financed. The margin will determine the interest rate that you pay on your loan.

Interim Caps
When you choose an adjustable rate mortgage, there is a chance that you will have to pay higher rates to compensate for the fixed rate loan market. The interim caps for ARMs can lessen the risk of rapidly increasing rates by putting a limit on how often the rate can change. Most ARMs have interest rate caps of 6 months or one year, but some can be as long as 3 years.

Payment Caps
Since adjustable rate mortgages can increase from one year to the next, the original loan statement can include a payment cap to limit how much the rate can increase in that year. The payment cap reduces annual payment increase shock for borrowers. Typically, payment caps are set so that your rate cannot increase to more than 7.5% of the previous payment.

Lifetime Caps
Similar to payment caps, lifetime caps can minimize the perpetual increase of interest rates for ARMs. The life span of the loan and the introductory rate are both factors that help determine the lifetime cap of the loan. Loans with high margins will usually have a lower lifetime cap and vice versa. Lifetime caps will vary depending on the loan and the company issuing the loan.