An adjustable rate mortgage, or an "ARM" as they are commonly called, is a loan type which offers a lower initial interest rate than most fixed rate loans. The trade off is the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.

Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk an increase in interest rates would lead to higher monthly payments in the future. It is a trade-off. You get a lower rate with an ARM in exchange for assuming more risk.

Below is some information explaining how ARM's work.

Adjustment Period

With most ARMs, the interest rate and monthly payment are fixed for an initial time period such as one year, three years, five years, or seven years. After the initial fixed period, the interest rate can change every year. For example, with 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.

Index

Our ARM interest rate changes are tied to changes in an index rate. 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.

Margin

To determine the interest rate on an ARM, we will add a pre-disclosed amount to the index called the "margin." If you are still shopping, comparing one lender's margin to another's may 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.

Interest-Rate Caps

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 limit the interest rate increase or decrease from one adjustment period to the next.
2. Overall or lifetime caps 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 may 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

"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.

Prepayment Penalties

Some lenders may require you to pay special fees or penalties if you pay off the ARM early. We never charge a penalty for prepayment.

Contact a Mortgage Banking Officer

Selecting a mortgage may be the most important financial decision you will make and you are entitled to all the information you need to make the right decision. Please feel free to contact a Mortgage Banking Officer if you have questions about the features of our adjustable rate mortgages.

There is no charge to you for the credit information we will access with your permission to evaluate your application online. You will only be charged for a credit report if you decide to complete the application process after your loan is approved.

None of the loan programs we offer have penalties for prepayment. You can pay off your mortgage any time with no additional charges.

Both a home inspection and an appraisal are designed to protect you against potential issues with your new home. Although they have totally different purposes, it makes the most sense to rely on each to help confirm you have found the perfect home.

The appraiser will make note of obvious construction problems such as termite damage, dry rot or leaking roofs or basements. Other obvious interior or exterior damage which could affect the salability of the property will also be reported.

However, appraisers are not construction experts and will not find or report items which are not obvious. They will not turn on every light switch, run every faucet or inspect the attic or mechanicals. A home inspector generally performs a detailed inspection and can educate you about possible concerns or defects with the home.

Accompany the inspector during the home inspection. This is your opportunity to gain knowledge of major systems, appliances and fixtures, learn maintenance schedules and tips, and to ask questions about the condition of the home.

Please contact your lender if you have questions about attorney representation. By all means, we recommend that you have an attorney at the closing if it would make you more comfortable. If your attorney has any questions about your new mortgage, please refer them to us. We would be happy to provide any information necessary.

Mortgage Loan Calculator

Use our calculator to get an idea of what your monthly payment would be if you know the loan amount you’re looking for. You'll also be able to print an amortization schedule to see your payment breakdown for the life of the loan.