Adjustable Rate Loans

Hundreds of ARM loans are available. We offer monthly, 6 month, one year, 3/1, 5/1, 7/1, 10/1, and 15 year adjustable rate loans.  NEW! Loans with payments fixed for 1 or 5 years.

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Key Benefits of Adjustable Rate Loans

Lower start rate  1.00% Now * (Rates subject to change. Call for APR info.)

Easier qualifying

Lots of flexibility in programs and choice of Indexes

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Sample of Options on Adjustable Rate Loans

Adjustment Periods        

3.85% Monthly ARM   
6 month ARM             Rate adjusts each 6 months.    
1 year ARM	        Rate adjusts each year.
Monthly ARM             Rate adjusts monthly.    

Indexes     Cost of Funds Index/1 year T-Bill/ LIBOR /Prime Rate     

  Features of Adjustable Rate Loans


Adapted from the "Consumer Handbook on Adjustable Rate Mortgages"

published by the Federal Reserve Board and Office of Thrift Supervision.

     An adjustable rate mortgage (ARM) is a mortgage for which the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. Such loans are also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs).

     Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. The lower rate may provide you with lower cash outlays in the first year of the loan and in the years thereafter should rates remain relatively stable or decrease. Additionally, you may be able to qualify for a greater amount under an ARM program than a fixed rate program.

     Rates have decreased in recent years, and many adjustable rate holders have been net gainers. (See Interest Rate and Payment Adjustment Illustration for an example of an ARM utilized from 1980 to 1994).

     Nevertheless, interest rates may increase, leading to higher monthly payments in the future. You face a trade-off; you obtain a lower rate with an ARM in exchange for assuming more risk. The information which follows should help you evaluate and understand the risks.

Adjustment Periods

     The interest rate and monthly payment of most ARMs change every year, every three years, or every five years. The period between one rate change and the next is called the adjustment period. Thus, a loan with an adjustment period of one year is called a one-year ARM, and the interest rate can change once every year.
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The Index
     Most lenders tie ARM interest rate changes to changes in an "index rate." These indexes usually go up and down with the general movement of interest rates. If the index rate moves up, so does your mortgage rate in most circumstances, and you will probably have to make higher monthly payments. On the other hand, if the index rate goes down your monthly payment may go down.

     Lenders base ARM rates on a variety of indexes. Among the most common are the rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. A few lenders use their own cost of funds, over which, unlike other indexes, they have some control. You should ask what index will be used and how often it changes. Also ask how it has behaved in the past and where it is published.
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Margins
     To determine the interest rate on an ARM, lenders add to the index rate a few percentage points called the "margin." The amount of the margin can differ from one lender to another, but it is usually constant over the life of the loan.

Discounted Interest Rates 

     Some lenders offer initial ARM rates that are lower than the sum of the index and the margin. Such rates, called discounted rates, are often combined with large initial loan fees ("points") and with much higher interest rates after the discount expires.

     Additionally, very large discounts are often arranged by the seller. The seller pays an amount to the lender, who then provides you a lower rate and lower payments early in the mortgage term. This arrangement is referred to as a "seller buydown." Utilizing such, the seller may increase the sales price of the home to cover the cost of the buydown while actually decreasing the buyer's monthly payment.

     To illustrate how a discount might work, assume the one-year ARM rate (index rate plus margin) is at 10%. Your lender is offering an 8% rate for the first year. With the 8% rate, your first year monthly payment would be $476.95. However, the first adjustment of your loan may increase your payment substantially:

ARM Interest Rate Monthly Payment

First year (with discount) at 8% $476.95
2nd year at 10% $568.82

Note that, although the index rate did not change, the monthly payment increased from $476.95 to $568.82 in the second year. If the index rate increases 2% in one year and the ARM rate rises to a level of 12%, the payment increases almost $200:

ARM Interest Rate Monthly Payment

First year (with discount) at 8% $476.95
2nd year at 12% $665.43

     To protect borrowers from extreme increases in monthly payments, most ARMs have ceiling, or "caps", and many allow borrowers to convert to a fixed-rate mortgage. Should you convert, the new rate is generally set at the current market rate for fixed-rate mortgages.
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Interest-Rate Caps

An interest-rate cap places a limit on the amount your interest rate can increase. Interest caps come in two versions:

•Periodic caps, which limit the interest-rate increase from one adjustment period to the next; and

•Overall caps, which limit the interest-rate increase over the life of the loan. By law, virtually all ARMs must have an overall cap.

The following example illustrates an ARM with a periodic interest rate cap of 2%. At the first adjustment, the index rate increases 3%:

ARM Interest Rate Monthly Payment

First year at 10% $570.42
2nd year at 13% (without cap) $717.12
2nd year at 12% (with cap) $667.30

Difference due to cap: $49.82

     A drop in interest rates does not always lead to a drop in monthly payments. In fact, with some ARMs that have interest rate caps, your payment amount may increase even though the index rate has stayed the same or declined. Such may occur after an interest rate cap has been holding your interest rate down below the sum of the index plus margin.

     The example below illustrates a periodic cap of 2% with an index which increased 3% at the first adjustment. If the index remains the same in the third year, your rate would go up to 13%:

ARM Interest Rate Monthly Payment

First year at 10% $570.42

If index rises 3%
2nd year at 12% (with 2% rate cap) $667.30

If the index stays the same
for the 3rd year at 3% $716.56

Result: Although the index stays the same in 3rd year, payment increases $49.26

     Therefore, as a general rule, the rate on your loan can go up at any scheduled adjustment date when the index plus the margin is higher than the rate you are paying before that adjustment. Back to Top of Page

Payment Caps

     Some ARMs include payment caps which limit your monthly payment increase at the time of each adjustment, usually to a percentage of the previous payment. In other words, with a 7.5% payment cap, a payment of $100 could increase to no more than $107.50 in the first adjustment period, and to no more than $115.56 in the second.

     Assuming your rate changes in the first year by 2 percentage points, your payments can increase by no more than 7½% in any one year as follows:

ARM Interest Rate Payment

First year at 10% $570.42
2nd year at 12%
(without payment cap) $667.30
2nd year at 12%
(with 7.5% payment cap) $613.20

Difference in monthly payment: $54.10 Back to Top of Page

Negative Amortization

     Should your monthly mortgage payments not be large enough to pay all of the interest due on your mortgage due to a payment cap, negative amortization may occur.  These are cash flow loans.  Because payment caps limit only the amount of payment increases, and not interest-rate increases, payments sometimes do not cover all of the interest due on your loan.

     If your ARM allows for negative amortization, the interest shortage in your payment will be automatically added to your debt, and interest may be charged on that amount. Your mortgage balance increases, and you may owe the lender more later in the loan term than you did at the start.

     This final illustration uses the figures from the preceding example to show the effect of negative amortization during one year. Your first 12 payments of $570.42, based on a 10% interest rate, paid the balance down to $64,638.72 at the end of the first year. The increased rate of 12% in the second year results in a payment higher than the 7½% payment cap. The capped payments are not large enough to pay the interest owed. The interest shortage, upon which you also pay interest, is added to your debt, producing negative amortization of $420.90 during the second year.

Beginning Loan Amount $65,000.00
Loan amount at end of first year $64,638.72

Negative amortization during 2nd year $420.90
Loan amount at end of 2nd year $65,059.62

(If you sold your house at this point, you would owe approximately $60 more than the amount you originally borrowed.)

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