The Factors That Change ARM Rates

adjustable rate mortgage

For certain people, adjustable-rate mortgages are the preferred loan format. This is a format where mortgage rates can change through the life of the loan, and the number you’re repaying to mortgage lenders may change.

For people who stand to potentially benefit from the benefits of these kinds of loans (lower starting rates and requirements in many cases, for one), knowing which factors influence the adjustable mortgage rates in these loans is vital. Courtesy of Altius Mortgage and our partners at Mortgage Ogden, here are the basics on how changing mortgage rates are influenced.

Index

Also called reference rate, this is the average rate at which a given financial institution borrows unsecured funds. The index is the largest factor behind changes in interest rates for ARM loans. Different mortgages use different indexes – in the United States, these are the most common:

  • COFI: Short for 11th District Cost of Funds Index, this is based on reports from qualified member banks of the Federal Home Loan Bank of San Francisco. It’s updated once a month.
  • LIBOR: Short for London Interbank Offered Rate, this is updated daily and is used most commonly by private lenders.
  • MTA: This represents 120-month Treasury Average Index, and is based on a 12-month average of yields of securities issued by the US Treasury. This index is calculated monthly, and is considered very stable.
  • CMT: Or Constant Maturity Treasury, this is also based on the US Treasury yield, though it has to do with maturity dates on securities. CMT is more volatile than many others.
  • National Average Contract Mortgage Rate: An index based on the rates homebuyers paid if they bought within five working days of the end of the month. This is the traditional, most common index for ARM loans.

Index Caps

Because sharp rises could put people in a huge financial bind, index caps were created. These cap how much interest can change, either for the life of the loan or within a certain specific period. However, be aware that index caps only apply for interest – extra money above the cap is redistributed toward the balance, and can lead to higher monthly payments.

Margin

This is a fixed number that’s settled on before the loan. It’s not adjusted during the loan, so it lends some stability.

Discounts

In some cases, you can receive a discount for a year or two on your ARM. Speak to your broker about whether this is possible in your situation.

Want to learn more about mortgages, or any of our services? Speak to one of our mortgage brokers at Altius Mortgage today.

Comparing Adjustable and Fixed Rate Mortgage

When you are preparing to purchase a new home, one of the decisions you need to make is whether you are going to get a fixed-rate or an adjustable-rate mortgage. The two types of mortgages have some pretty significant differences, and choosing the one that is right for your situation will impact you throughout the life of your loan. Here are some important tips for comparing these two products.

Fixed-Rate Mortgages

After the housing market crash of the late-2000s you heard many people discussing the value of a fixed-rate mortgage. Many homebuyers prefer these types of mortgages to adjustable rates since they offer stability in payments from the time you purchase your home until the time you sell, regardless of what happens in the markets. The predictability of these loans means you are not watching the ever-changing market interest rates and wondering what your monthly mortgage payments will look like next month or next year.

Shopping around, comparing loans, and calculating your monthly payment are all pretty straightforward with a fixed-rate mortgage, and you won’t need to do any math or make any predictions about changes to interest rates for the near future, which is enough to make most homebuyers choose this option. These mortgages are often a better choice for someone who is planning to remain in their home for the long term (more than five years), or if there is a pretty good indication that mortgage rates could rise significantly in the near future.

Adjustable-Rate Mortgages (ARM)

One of the main disadvantages of a fixed-rate mortgage is if you are unlucky enough to lock in your rate at a time when interest rates are higher. If you buy today at a rate of 4.5%, but rates continue to drop over the next year to 3.5%, this lower rate could make a significant difference in your monthly payments. With an adjustable rate mortgage, commonly called an ARM, you will be able to take advantage of falling interest rates and can get a better monthly payment out of it.

ARMs also generally have lower initial interest rates, which can save you money if you are not planning to stay in your house for very long—for example, if you plan to flip the home or you are only temporarily living in an area for a job. However, if things change and you end up staying in your home longer than you thought, and/or interest rates rise significantly over the time you have your loan, you could see your monthly mortgage payments go up.

Deciding Which Loan to Get

Your best option will depend a lot on your personal financial situation and your plans for the home. Before making any decisions, sit down with an experience loan advisor from Altius Mortgage to discuss your options and make sure you clearly understand each type of loan.