Most borrowers now know that ARM stands for Adjustable Rate Mortgage, or a home loan that has an interest rate that changes every certain period. These kinds of home loans became popular among lenders when interest rates were increasing quickly and lenders were lending at fixed rates for 25 or 30 years.

When interest rates remained for years at a time, traditional fixed rate home loans worked; when interest rates became unstable, banks started protecting themselves with ARMs.

ARMs are for thirty years usually, with interest rates changing in the course of that term. Most borrowers don’t actually concern themselves with the term of an ARM, but rather how often the rate “resets”. If a borrower plans to stay in his home for a long time, he should try to obtaina fixed rate mortgage since paying off an ARM means new closing costs, etc.

The most advantageous type of an ARM for a homeowner is the 5 year adjustable. If you choose an ARM that changes the rate more frequently, you take a big chance on being hit by temporary spikes in the interest rate. For example, if your loan rate is 6%, it will stay at 6% for five years, even if market rates have increased to 8% over these five years.

With an annually adjusted ARM, the borrower would have had all of the increases in between. But you can be protected against runaway interest rates with a cap agreement.

The length of time you believe you will live in your home is the best gage for the adjustment terms of your loan. If you only plan on being in it for a couple of years, your main worry should be what the initial rate on the ARM is. If you will live there for 10 or more years, you have to be concerned about the changes at each reset period. Normally you will not be able to get an adjustment period of more than 7 years.

The other option to look at in ARMs is what the reference financial instrument is: LIBOR, Tbills, Tnotes, etc. Each of these has benefits and disadvantages, depending on the situation of the borrower. Remember that if you have an ARM that adjusts frequently, your mortgage payment will change often.

This is not an ideal situation for many people, who have to live on a set budget.

Contact us at courtier hypothecaire and you may also be interested in pret hypothecaire