ARM loans (adjustable rate mortgage), have an interest rate that is fixed for a period of time such as 5-10 years. During this time the rate is much lower than a Fixed loan providing a reduced monthly payment which allow you more financial flexibility.
ARM loans are great for homeowners looking to divert money from the mortgage to pay off credit cards or installment loans. They are perfect for a new homeowners that are short term in their home. These loans a must consideration for DOWN-SIZER’s. If you know you are only going to stay in a home for 4 years, why would you over pay on interest rates to secure a note rate for 30 years fixed? It just doesn’t make sense to pay more interest when you know you will move from the home. A 5 year ARM means the rate 2.875% as of 11/20/2013, are fixed for 60 payments (5 years) before they adjust. Due to the low interest rates of ARM’s borrowers pay more principal in the initial years of the loan compared to the Fixed loan. The adjustment happens after the initial period of the loan is completed and will adjust once a year repeatedly for the duration of the loan. ARM loans adjust to the formula of Margin + index. The margin for most ARM loans is 2.25% and is fixed. The index we use is the 1 year LIBOR currently at 0.63% as of 11/20/2013. When the loan arrives to its periodic adjustment you would simply add 2.25 (margin) .63 (current LIBOR) = 2.875%. This would be your interest rate for the next 12 months. (Rates are rounded to the nearest .125%)( 1 year LIBOR).
These loans do not negatively amortize such as their distant and dangerous cousin the “Option ARM”. Any of Hippo Financial ARM loans will pay down the principal in each payment and lower the interest in those payments as well.