Adjustable Rate Mortgages

This type of mortgage, ARM for short, may allow home buyers to have lower monthly payments than other mortgage options for the “same amount of house.” Or in some instances ARMs may be used to qualify for larger loans and more buying power. Many factors impact ARMs, including how long you plan on owning a particular home and your personal investment philosophy.

Adjustable rate mortgages are usually tied to an index. They include rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).

In addition to a one year adjustable which modifies every year, North Star Home Lending offers three- five-, seven-, and ten-year programs which remain fixed for the first portion of the loan before they begin to modify. Various features, as well as programs with different annual and lifetime rate caps, interest only options, and other unique parameters are also available. Our seasoned staff is always ready to educate our clients as well as assist you in determining the right choices for you. For more information, please contact your North Star Home Lending professional.

Unlike fixed rates adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest rates rise.

Adjustable rate mortgages are characterized by their index and limitations on charges (caps). In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.

Adjustments are typically made by adding to the appropriate index a fixed margin or spread, which is noted in your mortgage, thus yielding a new rate. Your new effective rate can never be higher or lower than the limitations that were set forth when you originally executed your documents.

Given recent changes, maximum mortgage amounts now vary by state. The maximum conforming mortgage currently in the State of Michigan is $417,000. Your North Star Home Lending loan officer can advise you of the conforming loan limit for any state in which you may have an interest.

Other advantages include:

• The ability to leverage today’s dollars against tomorrows
• The potential to pay a lower rate for transient buyers
• An ability to recycle a mortgage with cyclical rate trends

Some studies have shown that the majority of borrowers with adjustable rate mortgages save money in the long term, but that some borrowers pay more. The price of potentially saving money, in other words, is balanced by the risk of potentially higher costs. In each case, a choice would need to be made based upon the loan term, the current interest rate, and the likelihood that the rate will increase or decrease during the life of the loan.

For further information, please contact your North Star Home Lending professional.