Adjustable Rate Mortgage

An Adjustable Rate Mortgage is an excellent loan product for people who will stay in their homes for only 3, 5 7, or 10 years. Other advantages offered with adjustable rate mortgages (ARM's) are you can either pay interest only or both interest and principal on the mortgage. Typically, the interest only payments last for the first 3, 5, 7 or 10 years. After this period, the payments become principal and interest and amortized for the remaining years left on the loan. For example, if you select a 5 year interest only ARM loan with 30 years, the first five years will be interest only payment and the remaining term of 25 years will be amortized for 25 years. You can get some valuable advice from a licensed mortgage lender or broker who offers arms with or without interest only loans.

Adjustable rate or variable rate mortgage loans have interest rates and monthly payments that fluctuate. With Adjustable Rate Mortgages (ARMs), periodic changes relating to a defined index are made to the interest rate. Common Adjustable Rate Mortgages include:

Negatively Amortizing Loans

A negative amortization loan, which is sometimes called "NegAm" by industry folks happens when the home loan payment for any payment period is lower than the interest charged over that period which makes the outstanding loan balance increase.

Option ARMs

An "Option ARM" is either a 30-year or 40 year ARM that initially provides the borrower up to four monthly payment options: a minimum payment(usually negative amortization), an interest-only payment, a 15-year fully amortized payment, and a 30-year fully amortized payment. Mortgage Lenders and borrowers may have also heard other names for these exotic home loans such as "pick-a-payment" or "pay-option" ARMs.

Hybrid Loans

A hybrid ARM has a fixed interest rate for an initial period and is a synonym for Fixed-period ARM. The word "hybrid" is used because of the ARM's blend of fixed-rate and adjustable-rate features.

Fixed-Period ARMs

A Fixed period adjustable-rate mortgage (ARM) features an initial interest rate period that is fixed before any adjustment. In general, fixed-period ARMs are offered with fixed-interest rate periods of 2, 3, 5, 7 and 10 year terms. After the fixed rate period ends, the interest rate adjusts based on the index plus margin for the term remaining on your 30 year mortgage. The interest rate adjustment after the fixed period is usually limited to a maximum interest rate cap structure spelled out in your mortgage note. After the first adjustment, your rate will adjust every six months or each year depending on your index. These are also called "hybrid ARMs".

Two-Step Mortgage

An adjustable rate mortgage which has one interest rate for the first part of the mortgage (usually five or seven years), and a different interest rate for the remainder of the mortgage.

Convertible ARMs

A convertible ARM is a type of Adjustable Rate Mortgage which permits the borrowers to convert their ARM to a fixed-rate without the expense of refinancing. There are several variations of this type of loan, so you should be informed about the various options before you decide on a loan.

Buydown Mortgage

What is a 3-2-1 Mortgage Buydown?
A 3-2-1 mortgage is a 30-year fully amortized mortgage which features interest rate increases of 1% every year for the first three years. After the first three years, the interest rate becomes fixed for the remaining 27 year term. For example, your mortgage loan balance is $410,000 and the interest rate is fixed at 6.75% for 30 years. The buyer or seller could buy down the interest rate by paying a lump sum. You simply add uo the savings for each year and that is the one lump sum. A 2-1 buydown works in similar fashion with one less year.