QandAs: Loans

What is the Most Common Type of ARM?

Answer:
Borrowers may choose an adjustable rate mortgage

to qualify for a more expensive home or to receive a low initial rate on their home loan. While ARMs are a common choice, many borrowers choose a fixed rate home loan because the risks are few.

Adjustable rate mortgages offer several flexible payment options, which can result in negative amortization. Negative amortization occurs when the monthly interest payments are less than the interest-due. In turn, the mortgage balance rises each month. The most common type of adjustable rate mortgage, and the one with the lowest risk, is the fully amortizing ARM.

The fully amortizing ARM is a great option for borrowers who prefer a low initial rate, but want to avoid negative amortization. This option lets the borrower pay a low fixed rate for a period of one, three, five, seven, or ten years. Afterwards, the interest rate adjusts annually for the remainder of the loan term. Monthly payments will increase, decrease, or stay the same with every rate adjustment. This is necessary to ensure that payments remain fully amortized, which guaranteed a payoff time of 30 years. Fully amortizing adjustable rate mortgages are also common because they offer an interest rate caps. There are no rate caps on an Interest-only ARM or Option ARM.


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