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Adjustable Rate Mortgage
Searching for an adjustable rate mortgage can be confusing. There are literally hundreds of different combinations of adjustable rate mortgages available. The typical adjustable rate mortgages that are very common are short term adjustable with a fixed period of between 2 to 10 years. You'll see terms such as 2/6 ARM or maybe a 5/1 ARM, 10/1 or 10/6.
The first term is the fixed period in years 5/1 is fixed for 5 years and becomes adjustable after the fifth year. The 1 typically means that the adjustable rate follows the 1 year US Treasury Bill. A 5/6 is fixed for 5 years and after the fifth year, follows the 6 month LIBOR or London Interbank Offered Rate. Adjustable rate mortgages carry a margin above the index that they follow. For instance, if the LIBOR is 4.32% and the margin that your mortgage follows is 2.25% above the index, then the total rate would be 6.57% when it reaches the fully adjusted rate.
Consider Rate Caps and other details
There are other considerations when choosing your adjustable rate mortgage such as the maximum, or Cap, that the rate can reach, how often it can adjust once it starts adjusting and whether it is assumable or not. There are other factors to consider on any loan of course, such as prepayment penalties and how these penalties may affect your plans to sell or refinance in the future.
When applying for an adjustable rate mortgage, make sure that you ask about all of the available adjustable available and be sure that you tell your loan officer what your plans are in the next 2 to 5 years. You need to consider the whether to have a prepayment penalty or not and what fixed term you need to suit your comfort level.
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