(Newswire.net — November 21, 2013) Huntington Beach, California —
CB Investments, located on the web at http://cbinvestments.com, is a Huntington mortgage company that offers guidance on many types of mortgage products. Now, the Huntington Beach mortgage experts offer advice on understanding ARM’s.
The fixed-rate mortgage is still the most popular type of mortgage for Orange County homeowners. However, an adjustable rate mortgage, or ARM, is also popular for certain homebuyers. While most ARM’s are hybrids that contain both fixed rate and adjustable rate features, it is important to know the basics of ARM’s. ARM’s will have an initial fixed rate period, which could be as little as 1 year, but after that, all ARM’s essentially work the same way, including the fact that most will adjust annually or once per year.
After the initial fixed period, here are the common components of ARM’s:
- Index. This is how the loan adjusts and will be based on current economic conditions. The LIBOR or London Interbank Offer Rate, the one-year Treasury Bill, and the Wall Street Journal Prime Rate are a few common indices used to determine ARM adjustments. The index used for any given loan will be detailed in the mortgage contract.
- Margin. One of the crucial factors for an ARM, and one frequently ignored by those who hope to get a lower initial interest rate, is the margin on the loan. The margin is always fixed for the life of the loan. By adding the margin to the current index at the adjustment time, this is how the effective interest rate is calculated. Margins typically fall between 2.25 and 2.75 percent, but may go lower or higher depending on the loan.
- Caps. This amount is the limit that a loan’s interest rate can go up or down over the life of the loan and during any particular adjustment period. Caps are frequently given in a three-number configuration in which the first number indicates the amount the interest rate can be adjusted during the first adjustment period, second number the amount the rate can be adjusted during any subsequent adjustment period, and the third the amount the interest rate could be adjusted over the life of the loan. Therefore, a 2/2/5 ARM means that the loan can go up two percent during the first adjustment period and two percent any period thereafter to a maximum of five percent over the life of the loan.
Generally, ARMs are more appropriate for homeowners who have a shorter-term outlook on owning the home and can match the fixed period of the loan with their ownership plan. For example, a buyer who is reasonably confident she will not own the home longer than five years is probably well-suited to do a 5/1 hybrid ARM, whereby the first five years of the loan are at a fixed interest rate. ARMs are also popular for borrowers who have larger amounts of assets and ready cash who can absorb the possible fluctuations in interest rates. These borrowers will forego the safety of a straight fixed rate mortgage to take advantage of the lower ARM start rates.
CB Investments, at http://cbinvestments.com, is ready to help Orange County customers who want to purchase or refinance a home find the very best mortgage options. With ARMs, fixed-rate loans and other mortgage products, CB Investments is a full-service mortgage broker.
About CB Investments: As full-service Orange County mortgage brokers, CB Investments is ready to help customers find the right mortgage products.
For More Information: www.cbinvestments.com