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 of the repayment process can benefit from an ARM. For example, a medical student who is making less money now than they hope to make in the future could benefit from a smaller monthly payment at the beginning, and then pay more later. A borrower whose intention is to own the house only for a few years may strategically choose an ARM with the intention of selling the home before the adjustment period begins. If a borrower chooses an ARM, they usually will have a choice between an amortizing ARM and an interest only ARM. An amortizing ARM is the most common type. With this type of mortgage, the lender calculates a monthly payment that will pay off the entire balance within the term of the loan (usually 30 years). However, since ARM loans don’t have a fixed interest rate, the payments can fluctuate over that time period. Rates can increase or decrease with a bottom rate and an upper limit clearly defined in your loan document. An Interest Only (IO) ARM has more stringent requirements for the borrower because the bank is allowing you to not pay principal for up to 10 years. This keeps their level of risk high for an extended period of time. This type of loan (30-year term) allows you to make interest payments (no principal) for a preset number of years. This is most often the first 10 years (120 months) even if the rate is subject to change earlier. The actual money that you borrowed (the principal) is then scheduled to be paid off during a 20-year term (beginning in month 121) with interest and principal applied each month, so that the loan is complete at the end of the 30-year (360 month) term.
27
Powered by FlippingBook