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Adjustable Rate Mortgages - The Basics

An adjustable rate mortgage (ARM) has an interest rate that fluctuates periodically. This is in contrast to a fixed rate mortgage, which always has the same interest rate.

Every ARM has basic components:

  1. An index
  2. A margin
  3. Adjustment Period
  4. An interest rate cap
  5. An initial interest rate

The Index

An ARM’s interest rate is tied to one of many economic indices, some examples of which are the 1-year constant maturity Treasury security, the Cost of Funds Index, or the London Interbank Offered Rate. Different indices move at different rates so know the characteristics of the index used for your ARM.

The Margin

The interest rate for your ARM will be calculated by adding a margin to the interest rate from the index. The margin is basically the markup charged by the lender that allows them to make a profit off of your loan, such as adding 2% to the index, where the 2% is the margin. The margin of your loan usually does not fluctuate.

The Adjustment Period

The Adjustment Period controls when and how often your interest rate changes. For example, if your ARM has an adjustment period of 1 year, your interest rate will be subject to change at the end of each year and your monthly mortgage payment will be recalculated to reflect this change.

The Interest Rate Cap

Interest rate caps are built into the loan to protect the borrower from drastic interest rate fluctuations. The caps limit how much the interest rate or monthly payment can change at the end of each adjustment period. An ARM can also have a cap for the life of the loan. For example, during the life of a loan, the interest rate can only be increased by 5%.

The Initial Interest Rate

The Initial Interest Rate is the interest rate that you start with at the beginning of your loan period. The length of time your loan stays at this rate is built into the loan. For example, you may stay at the initial interest rate for 1 year, 5 years, or another length of time depending on your specific mortgage. This type of ARM is generally referred to as a Hybrid ARM. The initial interest rate for an adjustable rate mortgage is generally lower than that of a fixed rate mortgage.

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COLONIAL REALTY INC.
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"Sharon was very helpful and persistent in selling my home. Sharon and Bob Hanf did an amazing job keeping me in the loop of what was happening with my property and stayed in contact even if there was nothing to report. I really appreciated the dedication and consideration I consistently received throughout my entire experience. I would highly recommend Sharon or Bob or any of the realtors at Colonial Realty over any other realtors for certain. #honest #forthcoming #diligent #persistent #trustworthy #followthrough" 4/4/2017 bretthuskamp
We would just like to take this opportunity to Thank Bob Hanif for helping us find our dream home here in Atchison. He was so helpful and kind and went above and beyond for us which is really refreshing these days. We would highly recommend him if you are looking for an Excellent Realtor and an all around honest Professional with a great work ethic that genuinely cares about what you are looking for and won't stop until you find the home or property that is amazing! 10/2/2016 The Banister Family
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What a wonderful experience buying a house! In a very short period, Bob showed us multiple homes and went above and beyond in providing honest and genuine input for a completely professional experience. Best realtor experience I've had!! 07/18/2016 peggystarr9
Kyle helped me sell my home August of last year. He was very professional and easy-going. He made the process a lot easier for me to understand. There was even an issue a day of closing, at no fault of his own, but he was able to solve the problem and close the house on time. I highly recommend him as an agent. Thanks again. 07/11/2016 RiswR1991
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Kyle was my agent in closing two real estate purchases in the last year and was very efficient and professional. He guided me through the process each time, gave me tips, kept me appraised on the progress of the sale, answered any questions I had and was present at the closing. I would recommend him highly! 06/29/2016 mwalters1022
I would recommend Sharon Locke to anyone looking to buy or sell in Atchison. Sharon was our seller's agent on a recent transaction and she made the process very easy and successful. I appreciated her insight regarding staging our home and her knowledge of how to market the property at its best. Atchison is a difficult market for sellers, but we had over a dozen showings. After only 13 days on the market, we accepted a very good offer. I credit her expertise with making that happen. Throughout the process, Sharon fielded our many questions and helped guide us to closing. We appreciated her professionalism and attention to detail; nothing escaped her attention. From receiving an offer to closing day, she looked out for our interests and ensured that we had everything in order so we could close on another property the following day. In sum, I'm glad that we trusted Sharon with our real estate transaction. 05/25/2016 bobchilders9
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