| Unlike the fixed rate mortgage, an ARM's interest rate, as the name says, adjusts after a fixed period of time. Market interest rate risks will be the responsibility of borrower and in exchange, the lender will provide the borrower with certain benefits.
Conforming and Jumbo loan amounts are available. Conforming loan limits are set by FNMA and FHLMC and vary from region to region and the number of legal units in the subject property. If the loan amount requested exceeds these limits it will fall into "Jumbo" loan criteria. The rates and terms for Jumbo loans may be more restrictive.
Property Types – Single family dwellings, eligible condos, PUD's. Properties must meet conforming loan guidelines.
Gifts – All funds can be gift funds if your LTV is 80% or less. Otherwise the borrower needs to provide at least 5% of the cash from their own funds for the transaction.
Assumable – Some ARM programs offer assumptions to qualified buyers.
Reserves – Typically, 2 months reserves are required. Some programs may waive the reserve requirements while others may require 6 months or more.
Seller Contributions – The maximum is 6% of the lower of sales price or appraised value.
ARM Features
Index – A third party's rate (uninfluenced by lender and widely published) which reflects the market interest rates in general. The rise and fall of this rate determines the rise and fall of your ARM's rate.
Margin – The additional percentage the lender adds to the index for business costs and their profit.
Adjustment Periods – The period of time between the adjustments of your ARM rate. The adjustment will be based on any change in the index rate. Shorter adjustment periods offer lower rates; longer adjustment periods offer more stability.
Caps – Interest caps limit the amount your interest rate can increase or decrease from your original rate. Monthly payment caps limit the increase or decrease in your monthly payment.
Fixed Period – The initial period of your ARM when the interest rate is fixed (typically lower than a fixed rate mortgage.) This fixed period can be 6 months to 10 years.
Advantages:
The initial rate will be lower than fixed rate loans.
Borrowers may qualify for larger loan amounts.
A borrower may have substantial interest savings if the expect to sell or refinance near the term of the initial rate adjustments
Disadvantages:
Less security. The interest rate will typically go up higher than a fixed rate over the term of the loan which may result in higher mortgage payments after the rate adjusts.
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