Orlando ARM Mortgage Basics

Fixed rate mortgage interest rates are at historical lows. Thirty year fixed mortgages are still below 5%. Unfortunately, the mortgage crisis that was to some degree responsible for the economic crisis of 2008-9, which resulted in record numbers of mortgage foreclosures, makes getting those low fixed rates close to impossible for anyone with less than stellar credit. The Orlando mortgage market is no exception.

Someone who finds themselves in this position may find it a little easier to qualify for an Adjustable Rate Mortgage (ARM).

Because some of the uncertainty of future mortgage interest rates is transferred from the lender to the borrower, lenders have more incentive to extend credit.

Borrowers will find that the lower initial payments of the ARM enable them to purchase a home where they otherwise couldn't.

During periods of high interest rates, such as the early-mid eighties which saw mortgage interest rates in the neighborhood of 13%, an ARM made sense for a borrower willing to speculate that rates would not go higher. They benefited from low ARM introductory rates and could refinance to a fixed rate if interest rates dropped, as they did.

If your current financial position indicates consideration of a ARM, there are a few features with which to become familiar so that you obtain the best deal you can.

Index or ARM interest rates are based on some index rate that lets lenders determine and measure how interest rates are changing. Three of the most commonly used indices are the one, three, and five year US Treasury securities. Interest rates fluctuate, but a rule of thumb has always been that a longer term index will be less subject to as much fluctuation are a shorter one. This reduces the risk to you as the borrower by avoiding having your interest adjusted at the worst possible time.

Margin: This is a percentage that is the profit margin for the lender. It is added to the selected index rate and usually stays the same for the term of the loan.

Adjustment Period: Usually a time period of from 1 to 5 years, this period lets you know when your interest rate can be adjusted. Typical ARMs adjust on 1, 3, and five year intervals. The longer time between adjustments, the more likely that your interest rate and payment will change dramatically.

You don't get to choose the index rate except by choosing a lender that offers the index you prefer.

You also should look for the lowest margin you can find.

As far as the adjustment period is concerned, you want a longer one in the case where interest rates are rising, and a shorter one if they are falling.

Caps: This is the limit on the amount your interest rate can be raised at the adjustment period and over the life of the loan.

You naturally want these caps to be as low as possible.

ARMs allow you to either qualify for a larger loan than you would otherwise, or simply qualify, period. Fixed mortgage rates are low right now, but credit is tight.

The other reason to consider an ARM is that if you plan to stay in the house for only three to seven years, you might save thousands in mortgage payments, and find yourself in the position of being able to sell for a profit, or refinance to a lower fixed rate and a lower total mortgage.