An adjustable rate mortgage is a loan with a variable interest rate secured through a lean on a real property. Lenders require a lower loan to value ratio (Loan Amount / Property Value), are less flexible on income documentation requirements and have a stricter property type guidelines than for non jumbo loans. The bigger the loan, the bigger the risk and the stricter the lending guidelines.
Adjustable Rate Mortgages / Hybrid ARM loans carry a fixed interest rate for a predetermined period and will convert to an index (usually the Libor or treasuries) plus margin (a predetermined rate) once the fixed period is over. The margin will vary based on a number of factors such as credit score, LTV, property type and etc. As far as the index is concerned, the lender has total control over the decision of selecting the index. Some people think the Libor is the best and others prefer the treasury. There is no easy way to determine which loan is the best without looking at it as a package and taking into account the rates, fees, terms and etc.
The more common adjustable rate loans are 3/1 (rate is fixed for the first 3 years), 5/1 (rate is fixed for the first 5 years), 7/1 (rate is fixed for the first 7 years) and 10/1 (rate is fixed for the first 10 years) usually amortized over a 30 year period. An adjustable loan may be an interest only loan. Which basically means you only have to pay interest on the balance of the loan for the fixed period vs. principle and interest on a traditional loan.
Common terms important to understanding adjustable rate loans and calculating potential future costs:
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