Ask the Financing Expert Series
The Language of Financing: ARM (Adjustable Rate Mortgage) Definitions and Terms
Brian Liable, Sr Loan Officer, and Primary Residential Mortgage, answers your home financing questions.
"What is an ARM, and what do all those terms mean?"
The Language of Financing - ARMs
"When you meet with a lender to apply for financing, you may feel as if you are in a foreign country when the loan officer begins to talk about points, Regulation Z margins, PMI, and ARMs.
You are not alone if you feel left behind by loan terminology. Like many professionals, lenders use a highly specialized language. Don't hesitate to ask for a translation! This is especially true if you are investigating some of the more complicated loans with rates that can be adjusted periodically.
As you consider the various loan options, find out what the interest rate will be and at what point the lender will commit to that rate.
If the loan has an adjustable rate, be sure that you understand how often the rate will adjust, and by how much your payments may go up.
Find out if the loan can be assumed by a future buyer. The lender isn't trying to confuse you. The mortgage process is complicated, so just keep asking questions until you understand.
ARMs : Adjustable Rate Mortgages
These loans will not have the same monthly payment for the life of the loan.
This is the starting interest rate of the variable mortgage. It is often referred to as the teaser rate, since it is lower than the fully indexed rate. This is often done to induce people into the loan since the start rate is low.
Adjustment Period :
This is the length of time for which the interest rate is fixed. Therefore if the adjustment period is six months, then the interest rate will remain fixed for six months, after which time it will adjust.
This is the maximum the interest rate can adjust up or down each adjustment period.
The maximum interest rate over the life of the loan.
This is the variable that the rate is calculated from. This is normally a number that is published in business newspapers. Well know indices include :
- Prime rate: the rate offered to the bank's best customers.
- Treasury bill rate: Short term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year.
- Libor: London Interbank Offered Rates. Average London Eurodollar rates.
- 6 month CD rate the average rate that you get when you invest in a 6 month CD.
- 11th District Cost of Funds: Rate determined by averaging the cost of money to banks that make the San Francisco 11th district of the Federal Reserve.
This is a fixed number added to the index to compute the actual rate.
Some variable loans come with options to convert them to a fixed loan based on a pre-determined formula, during a given time period. For example the 1-year tbill adjustable may be converted to a fixed during the first five years on the adjustment date. The means that you could convert during the 13th, 25th, 37th, 49th and 61st months of the loan.
Call Brian at 919-256-3133 for more information about ARM (Adjustable Rate Mortgages)."
Ask the Financing Expert Series
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Brian Laible - Ask Brian!
Sr. Loan Officer, Primary Residential Mortgage
701 Exposition Place, Suite 118, Raleigh, North Carolina 27615