Adjustable-Rate Mortgage Loans

An adjustable-rate mortgage, or an “ARM” as they are commonly called, is a loan type that offers a lower initial interest rate than most fixed-rate loans. The trade-off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.

Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It’s a trade-off. You get a lower rate with an ARM in exchange for assuming more risk.

For many people in a variety of situations, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for three to five years.

Adjustment Period

With most ARMs, the interest rate and monthly payment are fixed for an initial time period. TVFCU offers five, seven, or ten years. After the initial fixed period, the interest rate can change every six months. For example, one of our most popular adjustable-rate mortgages is a five-year ARM. The interest rate will not change for the first five years (the initial adjustment period) but can change every six months after the first five years.

Index

Our ARM interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indices is published weekly in the Wall Street Journal. If the index rate moves up, so does your mortgage interest rate, and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down, your monthly payment may decrease.

Margin

To determine the interest rate on an ARM, we’ll add a pre-disclosed amount to the index called the “margin.” If you’re still shopping, comparing one lender’s margin to another’s can be more important than comparing the initial interest rate, since it will be used to calculate the interest rate you will pay in the future.

ARMs typically have an initial fixed-rate period, after which the interest rate adjusts every six months based on a specified index plus a margin. The frequency and amount of adjustments are outlined in the loan agreement.

Mortgage interest rate movements are as hard to predict as the stock market and no one can really know for certain whether they’ll go up or down.

If you have a hunch that rates are on an upward trend, then you’ll want to consider locking the rate as soon as you are able. Before you decide to lock, make sure that your loan can close within the lock-in period. It won’t do any good to lock your rate if you can’t close during the rate lock period. If you’re purchasing a home, review your contract for the estimated closing date to help you choose the right rate lock period. If you are refinancing, in most cases, your loan could close within 30 days.

If you think rates might drop while your loan is being processed, take a risk and let your rate “float” instead of locking. After you apply, you can lock in by contacting your Mortgage Originator by telephone.

There’s no cost at all for completing our application. TVFCU charges no upfront fees.

Refinancing allows you to switch from an ARM to a fixed-rate mortgage. This can be beneficial if you prefer payment stability or if interest rates are expected to rise.