An adjustable rate mortgage (ARM), otherwise known as a variable rate mortgage, can change depending on the initial terms agreed to.
These loans can change monthly, every three months, six months, one year, two years, three years, five years, seven years, ten years. They can be fixed for 2, 3, 5, 7, 10 years and then change annually or monthly thereafter.
All ARMs are based on something known as the Index. Various indices that exist are the Prime, the Treasury Bill Index (T-Bill), Monthly Treasury Average (MTA), the London Interbank Overseas Rate of Exchange (LIBOR), 11th District Cost of Funds Index (COFI), the Cost of Savings Index (COSI). The Index that your loan is based on derives its yield based on different factors. The Prime is immediately affected by the Federal Reserve’s tinkering with short term interest rates to stimulate or slow down the economy. The true rate you pay depends on the Index your ARM is tied to PLUS THE MARGIN!
Normally those taking an ARM want lower payments than the fixed rate mortgage for a predetermined time frame or want the ability to control their payments monthly. The key here is to match up your wants and needs with the different options available. Your DML Loan Officer will take you through the steps necessary to best determine the right program for you. The most common index used for ARMs are either LIBOR or T-Bill based indices.