ARMs – Adjustable Rate Mortgages Explained

ARMs – Adjustable Rate Mortgages Explained, by Des Moines Real Estate Experts RE/MAX Real Estate Concepts

The term ARM is us used by mortgage and real estate professionals when referring to an adjustable rate mortgage.  There are many forms of ARMs available to buyers in the Des Moines area. 

Simply put, a variable rate ARM is a loan that has a rate of interest that is fixed for a certain period of time, then adjusts to a new rate of interest for another period of time.  Most ARM’s adjust annually, after the initial period of time.  This will continue until the loan is paid off.  The term of most mortgages is either 15 or 30 years (although other terms do exist, and can be as little as 10 years or less, and as high as 40 years.) 

ARMs come in many shapes and sizes.  The most traditional ARM is  the 5/1 or the 10/1 year ARM.  The 5 or 10 refers to the initial period of “fixed” interest rate.  For example, a 10 year ARM mortgage with a 30 year term would be called a 10/1 ARM.  The interest rate would be fixed for the first 10 years and then adjust annually for the remaining 20 years until the loan is paid off. 

When reading any ARM product that is presented with a slash, IE: 3/1, 5/1, 10/1 etc., the first number is the initial period, and the second number is the frequency of adjustment (in most cases, annually.) 

The ARM adjusts based on an index plus an agreed upon premium.  The most common index used is the one year treasury note rate.  Another popular index is the LIBOR rate.  This is a European index based out of London.  It is popular with many Jumbo loans and is a favorite of the financial sector borrowers in New York, Chicago, and Los Angeles.  Another important item to look at with an ARM is the ceiling, floor, and lifetime ceiling.  The most common ceiling is 2% per adjustment and 6% lifetime.  The floor varies from lender to lender.  Recently, many lenders have changed the game and now use a 5% max ceiling per adjustment, and no ceiling.

There is a lot of free information available to you about buying, selling or investing in Des Moines real estate. For complete information about the Des Moines real estate market including current homes for sale, property values and more please visit the most complete website on line dedicated to everything Des Moines real estate at Real Estate with RE/MAX. Please feel free to contact us with any of your real estate or mortgage related questions and we will be more than glad to answer your questions. Call us at 1-800-708-5890 or email us at dsm@realestateconcepts.net.