The Adjustable Rate program menu includes numerous ARM programs that feature initial adjustment periods and shorter recurring adjustments. These include the 3/1, 5/1, and 7/1 programs. The initial interest rate is fixed until the first adjustment (i.e.- 3 years, 5 years, or 7 years). After the first adjustment, the interest rate adjusts annually. As with other ARM’s, the interest rate adjustment is based upon an index (usually the 1 year Treasury Bill or the LIBOR index), plus a margin (e.g. 2.75-3.00%). There are also limitations (caps) on the amount of rate changes. However, for many of these programs, the full lifetime cap applies to the first interest adjustment, with period caps thereafter.

BENEFITS:

These programs are very popular with borrowers who are certain that they will be selling their home before the first adjustment date. Therefore, they will have the benefit of a reduced rate for several years, without the risk (or with minimal risk) of having to pay higher interest in later years. The downside risk is that circumstances can change, and the borrower may be forced to pay much more in interest payments over the life of the loan. Also “payment shock” can be quite real with this type of mortgage program, since the interest rate can often be increased by 5-6% at the first adjustment. As with other ARM’s, these programs should only be selected after full disclosure and consultation with Michael Dunsky.