What is an Adjustable Rate Mortgage?

Adjustable interest rate mortgages (ARMs) are a new type of complex mortgage method in the United States, and their interest rates can vary with standard financial indexes. Changes in interest rates can affect the number of monthly payments, loan terms, outstanding loan balances, or a combination of these conditions. In the terms of mortgage, it is possible to limit the amount of periodic or accumulated interest or the allowable change in payments, also known as variable interest rate mortgages. The adjustment interval is often set in advance, including 1 month, 6 months, 1 year, 2 years, 3 years, or 5 years. ^[1]

Adjustable rate mortgage

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Adjustable interest rate mortgages (ARMs) are a new type of complex mortgage method in the United States, and their interest rates can vary with standard financial indexes. Changes in interest rates can affect the number of monthly payments, loan terms, outstanding loan balances, or a combination of these conditions. In the terms of mortgage, it is possible to limit the amount of periodic or accumulated interest or the allowable change in payments, also known as variable interest rate mortgages. The adjustment interval is often set in advance, including 1 month, 6 months, 1 year, 2 years, 3 years, or 5 years. ^[1]

Adjustable Rate Mortgages (ARMs)

What is an adjustable rate mortgage

One is the market interest rate (usually specifically the benchmark interest rate for government bonds), and the other is some interest rate indexes calculated based on the cost of funds of savings institutions. When adjusting interest rates, the reference interest rate is often increased by a certain amount.

There are hundreds of specific forms of adjustable-rate mortgages, and the names vary. Although the specific forms are not exactly the same, adjustable-rate mortgages have a basic characteristic that the loan interest rate is variable, but the basis, magnitude, and conditions of the change are inconsistent1.

The practice of adjustable interest rate mortgages Financial institutions calculate the interest rate of loans by adopting the method of instalment settlement. The interest rate of mortgage loans can be reset periodically. After the initial "preferential" low interest rate expires, it is usually reset every 12 months . The new interest rate is an increase in a fixed percentage, or "yield", on the index interest rate that changes up and down according to market conditions.

Generally, in order to attract customers, the initial interest rate can be lower than the fixed rate mortgage loan, and the return on interest rate rises. But adjustable rate mortgages only require the borrower to return interest at the beginning, so the borrower can borrow a larger amount of mortgage. In the future, when the payment of principal or loan interest rates is required to be increased, the repayment amount of such loans will increase, which often makes the borrower unable to pay the loan and leads to bad debts. Finally, there are so-called "Ninja" loans in the market, that is, loans for "no income, no work, no assets".