What does adjustable rate mean when purchasing a home?

Question

What does adjustable rate mean when purchasing a home? I am having to choose an adjustable rate variable.

Answer 1

it means after a specific time, your interest rate will go up... and continue to go up every 6 months to a year.

i am a mortgage specialist, and honestly i would never offer an ARM to a client.  arms pay more to the bank / broker.

i encourage you to think of a different option, like a 30 yr fixed rate.  if you have more questions, email me at [e-mail].  i would love to help you out and can get you a fixed rate that will never jump on you.

i work for Topdot Mortgage.  www.topdot.com

thank you and i hope this helped.

Answer 2

Well it means the interest rate will be periodically updated based upon whatever indices the lender chooses.  In other words your payment amounts will change, whenever the adjustment period for your particular loan elapses.  You benefit from this loan if the rate falls but are punished if the rate rises versus a fixed rate loan.   Basically you're turning your mortgage into a kind of gamble.

Answer 3

RRRRUUUUUUUUUUUUUNNNNNNNN!!!!!!!!!!!!

Answer 4

Not Good!!  Means your rate can go up or down.  The reason the market is so bad is because of options like this.  Try and get a low FIXED rate!!  And then LOCK it in!!  There are better loans out there than that!!  Good luck!!

Answer 5

It means your leinholder will raise your rates. And you'll end up paying triple the payments of what your home is worth. This is why EVERYBODY in america is foreclosing, they got this shiteous adjustable rate mortgages and they all got screwed. Get a fixed rate, or rent until you have better credit.

Answer 6

Those are the loans that got people into trouble.  After X number of years (whatever the terms are) your rate will go up a certain percentage above "prime".

If you get a 5-year arm your rate will be fixed for 5 years (say fixed at 5.75%) but after that it will go up to prime + 2% or so.  That means if you buy the house now, in 2013 your rate will go up to whatever the prime is in 2013 (13% of Obama wins, 6% if McCain wins) + 2% so it will be 15% or 8% or so, much higher than what it is now and will adjust with the market.

in this market it is best to lock in that current 6.5% or so, unless you KNOW you will sell the house before the rate starts adjusting.

Answer 7

A fixed rate mortgage is a loan secured by a house in which the interest rate charged by the bank remains fixed for the life of the loan.

An adjustable rate mortgage (ARM) is one in which the interest rate charged by the bank can fluctuate during the life of the loan.  The interest rate of an ARM is usually tied to a well-known index such a the London Interbank Offered Rate (LIBOR) that serves as an objective measure of the prevailing cost of money.  The interest rate on an ARM usually adjusts annually, but there are hybrid loans such as the 5/1 ARM, which works like a fixed rate loan for the first five years and an adjustable rate loan for the remainder of the term.

ARM's usually have annual and lifetime caps to prevent the interest rate from changing too quickly or too much.  For example, a 2/6 cap means that the rate can increase at most 2 percentage points in any year and at most 6 percentage points for the life of the loan.

Bankers want to lend money at prevailing interest rates and thus fixed rate mortgages present a dilemma due to their long terms.  When a bank issues a 30 year fixed rate mortgage, it commits its money for 30 years, knowing full well that prevailing rates will change.  If prevailing rates go up, the bank looses, as it charging less than prevailing rates.  If prevailing rates go down, the bank wins...maybe.

If interest rates go down enough, any borrower who can will refinance with another bank at the then prevailing rate.  To discourage refinancing, banks charge closing costs and prepayment penalties.  However, if prevailing rates go down enough, even these additional costs will not discourage borrowers.  Borrowers can unilaterally refinance their loans, but banks cannot force borrowers to do so, and this asymmetry puts banks at a disadvantage.

Banks offer ARM's as a way of correcting the imbalance caused by the borrower's ability to refinance.  One way to think of an ARM is as a fixed rate loan that is automatically refinanced every year at the prevailing interest rate.  Since banks prefer writing ARM's over fixed rate loans, they offer discounts to entice borrowers into taking ARM's.  For example, the average rate on a 30-year fixed mortgage today is 6.3%, but only 5.7% on a 5/1 ARM, a discount of 0.6%

Since ARM's disempower borrower's, a borrower must carefully consider the decision to take an ARM rather than a fixed rate loan.  When the prevailing rate is high by historical standards and almost certain to drop, an ARM is a good choice.  The borrower benefits from the subsequent drop in the prevailing rate without having to incur the costs of refinancing.  When prevailing rates are low by historical standards, the borrower must decide if the discount offered by the bank is a sufficient premium for assuming the risk that interest rates will go up.

The real risk to the borrower, however, is that prevailing interest rates will go up faster than the borrower's income at a time when the borrower cannot refinance or sell, causing him or her to go into default.

For example, the interest payment on a 300K 5/1 ARM at 5.7% is 17.1K per year.  The interest payment on a 300K fixed rate loan at 6.3% is  18.9K per year.  Suppose that interest rates climb over the next five years, a likely scenario, and that in the sixth year the rate adjusts to 7.7% and in the seventh year to 9.7%, because of a 2/6 cap.  By the seventh year, the ARM borrower's interest payment has almost doubled to 29.1K, while the fixed rate borrower's payment remains 18.9K.

Can the ARM borrower really afford to spend 12K per year more on housing starting in six years?  Even if he or she can, was the savings of 1.8K per year for the first five years worth it?

Answer 8

I agree with the answers here and would add that it is a really bad market to assume you CAN sell in 3 years even if you plan to.  If the house doesn't increase in value you likely may have to bring money to the table or may be stuck in the house when it resets.

The problem is that most people used ARMs to buy more than they could afford.

If you can't afford it at a 30-year fixed rate, it isn't worth doing, in my opinion

Answer 9

It's one of the reasons so many people have foreclosed. The interest rates "adjust" after a certain period of time, usually 6 months. Sometimes your mortgage payment will go up significantly. Don't get an adjustable rate variable unless you are prepared to pay a lot more on your mortgage every 6 months.