Keep Mortgage Payments Lower With an ARM
A new home is a big move! If you prefer to keep your mortgage payments low, consider an Adjustable Rate Mortgage.
We design ARMs with our members in mind. Lock in a low initial interest rate for one, three, or five years; after that, your rate adjusts annually—but not more than 2% per year or 6% over the life of the loan.
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An Adjustable Rate Mortgage, or ARM, is a loan type that offers a lower initial interest rate than most fixed-rate loans. The interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.
Although you'll enjoy lower payments at the beginning of the loan, an increase in interest rates can 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 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.
Here's more detailed information explaining how ARMs work.
With most ARMs, the interest rate and monthly payment are fixed for an initial time period such as one year, three years, or five years. After the initial fixed period, the interest rate can change every year. 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 year after the first five years.
Our ARM interest rate changes are tied to changes in an index rate. We currently use the One-Year Treasury Bill rounded to the nearest ⅕ of 1%. 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.
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.
An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:
1. Periodic or adjustment caps, which limit the interest rate increase or decrease from one adjustment period to the next.
2. Overall or lifetime caps, which limit the interest rate increase over the life of the loan.
As you can imagine, interest-rate caps are very important, since no one knows what can happen in the future. All of the ARMs we offer have both adjustment and lifetime caps. Please see each product description for full details.
"Negative Amortization" occurs when your monthly payment changes to an amount less than the amount required to pay interest due. If a loan has negative amortization, you might end up owing more than you originally borrowed. None of the ARMs we offer allow for negative amortization. Some lender may require you to pay special fees or penalties if you pay off the ARM early. We never charge a penalty for prepayment.