What Is A 1 Year ARM Mortgage
A one year ARM is an adjustable rate mortgage that has an interest rate that is fixed for the first year and then adjusts every year after the first year up and down for the other twenty nine years remaining on the loan.
The rates for a one year adjustable rate mortgage can be a full 2% below the current interest rates on a 30 year fixed mortgage. If you are planning on selling or refinancing with in a few years a 1 year ARM is worth looking at.
The 1 year ARM, as with most adjustable rate mortgages, has caps and margins. Meaning that the interest rate can only adjust a maximum (up or down) for each adjustment period. And there are limits on how much it can adjust up or down over the life of the loan.
An example of the caps might be 3% and 7%. Those rates basically tell you that the loan can only go up or down in interest 3% during an adjustment. And it can only adjust a maximum of 7% of the original margin.
The way that an interest is determined for an adjustable rate mortgage is by combining the index and the margin.
There are a variety of indexes that are used by lenders. They all have a variety of volatility. Examples of indexes are the LIBOR, T-Bill, and Treasury. The margin is the fixed portion of the interest rate.
Let’s say that when you locked the interest rate on your new 1 year ARM loan that index at the time was 1.25% and the margin is fixed at 2.00%. 1.25% plus 2.00% is 3.25% which would be your rate.
Here is another example to illustrate the caps. Using the example above your 1 year ARM has caps of 2% and 6% and your interest rate is 3.25%.
The lowest your interest rate will ever go is 2.00% because that is the margin. But to get that interest rate the index would have to be zero. Which we both know will never happen.
Let’s assume the index has risen to 3.5%. Your interest rate after the first year would now be 5.25% because it can only adjust a max of 2% per adjustment. Assuming worse case scenario your interest rate could be 9.25% after the end of 4 years because there is a cap of 6% over the initial interest rate
Hopefully this made the 1 year ARM understandable and did not confuse you. But if it did confuse you and it is a loan you are interested in. Call and speak with a mortgage pro in your area.
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