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Adjustable Rate Mortgage

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What is an adjustable rate mortgage?

An adjustable rate mortgage (ARM) is a mortgage in which the interest rate changes throughout the term of the loan. Most ARMs have a fixed interest rate for a set period. After that time passes, the interest rate resets, often on an annual basis. These adjustments could cause the interest rate on the mortgage to fall or rise, depending on the index to which the loan is tied. ARMs are also tied to a set margin, which is used along with the index to calculate the mortgage’s new interest rate.

Mortgages are usually tied to one of three indexes: the maturity yield on one-year treasury bills, the 11th District cost of funds index, or the London Interbank Offered Rate (LIBOR).

Why an adjustable rate mortgage?

The low introductory interest rate that adjustable rate mortgages offer is attractive to many borrowers. The introductory rates can last from one to 10 years, and borrowers often use an ARM when they plan to sell a property before the introductory interest rate expires.

While there are risks in taking out an ARM, borrowers are still protected. Most ARMs come with rate caps, which limit how much the interest rate can change. Periodic rate caps dictate how much the interest rate can change in the short-term. Lifetime rate caps limit how much the interest can increase during the life of the loan.

If you would like to explore adjustable rate mortgages or other mortgage products available from BrightPath, please call us at 888-222-6003, or complete our simple form below. One of our experienced mortgage specialists will contact you.




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