When rates go up, we usually see a switch over from the 30 year fixed to ARM loans.

Why go LONG at a high rate when you can go short at a lower interest rate and get the upfront savings? People do this to help ease the payment shock of rates going up and to help them qualify because of the lower rate. You are hoping that rates come down and you can refinance later to a lower rate than today’s fixed rate.  For example, if the 30-year fixed is 5.5% the adjustable probably starts at 3%

So how does it work:

The rate starts low and has an adjustment CAP of 1% or 2% depending on whether the change is every month, every 6 months or 1ce a year.

These have a FLOOR usually the start rate and more importantly have a lifetime CAP or CEILING on how high it can go usually 5% above where you started.

Your interest rate is calculated at the cost of money for example the 1-year US treasury bill called the INDEX plus a (profit) MARGIN usually about 2% over that number. So, if the 1 year US treasury bill is 2% today and my margin is 2% my rate is 4%.  My cap is 9%.

So when looking at adjustables, look at the start rate and FLOOR, the INDEX, the MARGIN, the period change % and the ceiling life CAP. If you would like the safety of a fixed but the low rate of an adjustable, then maybe you want a HYBRID mortgage. To learn more, Watch our mortgage minute on that.

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