Home Loan ARM

By: EconomyWatch Content   Date: 30 December 2009

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The interest rate and the monthly payments on the Home Loan ARM fluctuate over the life of the loan depending on the changes in a pre-specified index. In this type of a mortgage, the interest rate on the loan amount varies with the changes in an index. This is identified at the time of the application itself.

Some of the commonly used indices for Home Loan ARM are:

 

ü      Constant Maturity Treasury or CMT

ü      Treasury Bills

ü      12-Month Treasury Average or MTA

ü      Certificate of Deposit Index or CODI

ü      11th District Cost of Funds Index or COFI

ü      Cost of Savings Index (COSI)

ü      London Interbank Offering Rate or LIBOR

ü      Certificate of Deposit (CD) Indexes

ü      Bank Loan Prime Rate

ü      Fannie Mae’s Required Net Yield (RNY)

ü      National Average Contract Mortgage Rate

 

Features of Home Loan ARM

The interest rate on a Home Loan ARM is generally fixed for the first few years and remains variable for the remaining life of the loan. The fixed rate for the first years is usually significantly lower than the standard 30-year fixed rate mortgages. This type of a home loan is recommended if the interest rates are expected to fall. In case the interest rates are expected to rise, a Home Loan ARM may mean higher interest rates and increased monthly payments in the later years of the loan.

 

The variable or the adjustable rate is calculated by adding a margin or adding fixed percentage points to the pre specified index. The margin remains fixed for the life time of the loan and is not affected by the financial markets and the movements in the interest rates. Most of the Home Loan ARMs have an interest rate cap to protect the borrowers from enormous increases in their monthly payments.

 

A Home Loan ARM is recommended if a person intends to sell off his home quickly in the future or is renovating for sale or is a first time buyer and intends to move on in the future. The low initial interest rate on these types of loans allows the borrower to enjoy the low rate without having to worry about the increase in interest rates over the longer term.

 


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