When you’re looking to purchase a new home, you probably first think of securing an affordable monthly payment. Buyers have several options when it comes to structuring a mortgage loan and, in recent years, many have chosen adjustable rate mortgages (ARM) to keep their payments affordable.
It’s important to recognize that different types of ARMs exist. Interest rates for each type typically track the performance of a specific financial index, such as the Cost of Funds Index (COFI), London Interbank Offered Rate (LIBOR), and Treasury Index (CMT). Still, the mechanics of an ARM will always be the same, with an appealing low introductory rate for a set period of time, a scheduled date when the rate may adjust for the first time (increase or decrease), and frequency with which your interest rate can change. This can be seen in the way ARMs are named — you will hear them called 3/1 ARM, 5/1 ARM, 7/1 ARM or 10/1 ARM. The first number (3, 5, 7, 10) denotes the number of years in which the interest rate remains unchanged. The second number (the 1) denotes how frequently the rate can change in subsequent years. These rate adjustments usually include a cap, which puts a limit on how high your interest rate can increase over a given period or over the life of the loan.
The VA received federal authority to back ARMs in 2012. The basics of these loans remain the same as other conforming ARM’s by offering a lower than market interest rate for a fixed period of time (typically 5 years) and a government-mandated cap on annual adjustments of no more than 1% per year and a lifetime cap of 5%.
The Future of Interest Rates
As we near the end of 2018 with a strong economy, economists expect the US Federal Reserve to continue increasing the federal funds rate into 2019. This directly impacts the cost of borrowing money, including credit cards, auto loans and residential mortgage financing. As such, homeowners with ARMs will feel the effects of rising rates when they enter the adjustment period of their loan. With that in mind, the majority of those homeowners usually refinance into fixed rate mortgages that provide the certainty of a permanent monthly payment before reaching the adjustment period.
Ask AAFMAA About Fixed Rate Mortgages
There’s no doubt that traditional, fixed rate mortgages offer the safety and stability you seek when financing a home. Fixed rate mortgages mitigate risk levels often associated with variable rate financing and allow peace of mind when planning long-term financial goals.
If you currently have an ARM, now might be a good time for a complimentary mortgage review. Call AAFMAA Mortgage Services LLC today at (844)-218-6926, or email us at [email protected] to schedule a time to review your current mortgage. We’ll discuss how the rate caps, index, and margin affect your loan and compare how your ARM may behave in the future against a fixed rate mortgage.
With AAFMAA, you can breathe easy — our focus is always on doing what is right and best for our Members.
Originally from the Washington, D.C. metropolitan area, Pat Watts relocated to North Carolina in August 2016. She has worked in financial services since 1997 and residential financing since 2004, and joined AAFMAA in 2018. Written by Patricia (Pat) Watts. Pat (NMLS: 223901) is licensed in Iowa, Kansas, Kentucky, North Carolina and Virginia. Contact Pat at Direct: 703-707-1094 or 571-277-4172. Or by email at [email protected].