fair exchange for the peace of mind that they have a fixed amount to pay every month for the life of the loan. In that case, FRMs can be the ideal choice. However, if a borrower wants a lower interest rate at the beginning or does not see this purchase as a long-term hold, an adjustable-rate type is an alternative. The initial interest rate for an adjustable-rate mortgage (ARM) is typically lower than the FRM rate, but it is subject to change at specified intervals. So, an ARM (which amortizes over 30 years) can have a fixed-rate period for 5, 7 or 10 years. After the fixed period is over the rate is reviewed and adjusted every six months. The rate can go up or down within a specified cap range. The interest rate for ARMs is a combination of a margin (fixed percentage for the life of the loan) added to an economic index, such as The Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. SOFR is subject to change every day and is posted in the Wall Street Journal. There is a minimum and maximum rate assigned to the loan so that the highest and the lowest rate for the life of the loan is written into your note. For example you choose a 7 year ARM at 6%. This rate remains the same for 84 months. Approximately 45-60 days prior to your rate change you lender will indicate the new rate based on the margin (fixed for the life of the loan) and the current level of the index. If your margin is 2.75% and the index is now 4.00% your new rate would be 6.75%. If the index is 3% your new rate goes down to 5.75%. Your initial note will tell you the maximum amount the rate can increase or decrease at any particular change and the minimum/maximum rate allowable for the life of the loan. Most ARMS issued from 2023 forward are reviewed every six months after the initial adjustment period has begun.
Borrowers who want lower monthly payments at the beginning
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