Real Estate 101 - Adjustable Rate Mortgage (ARM)


	What is an Adjustable-Rate Mortgage (ARM)?
	What is Initial Interest Rate or Teaser Rate?
	What is Cap?
	What is Periodic Interest Cap?
	What is Lifetime Cap?
	What is Payment Cap?
	What is an Adjustment Date?
	What is an Adjustment Period?
	What is a Convertible ARM?
	What is a Prepayment Penalty?
	What is a Preliminary Title Report?

What is an Adjustable-Rate Mortgage (ARM)?
Adjustable-Rate Mortgage is a mortgage where the interest rate is not fixed for the life of the loan. These mortgages adjust periodically based on an index that changes with market conditions. The rate of interest is the sum of the index plus a margin ( the margin remains fixed for the life of the loan).
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What is Initial Interest Rate or Teaser Rate?
Initial interest rate or teaser rate is the low interest rate in the beginning period on an adjustable-rate mortgage. It remains fixed for certain period of time and on the first Adjustment Date it goes up or down depending on the market and terms of your mortgage.
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What is Cap?
Cap is the amount of increase or decrease that can take place on the interest rate or payment on an Adjustable-Rate Mortgage.
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What is Periodic Interest Cap?
Periodic Interest Cap is the limit for the interest rate to change between two adjustment periods on an adjustable-rate mortgage.
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What is Lifetime Cap?
Lifetime cap is the limit the interest rate can increase or decrease over the life of an adjustable-rate mortgage. For example, if the initial interest rate on an adjustable-rate mortgage is 8 % with a lifetime cap of 5%, the interest rate will not go lower than 3% or higher than 13% over the life of the mortgage.
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What is Payment Cap?
Payment Cap is the limit for the payments to go up or down on an adjustable-rate mortgage. For example, an adjustable-rate mortgage may have a payment cap of 7.5%, where the payment can go up or down 7.5% every 12 months. The main disadvantage of mortgages with payment cap is the negative amortization. When the payment you make is lower than the interest accrued, which gets added onto the mortgage balance. As a result, you see mortgage balance being increased over time, instead of being reduced.
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What is an Adjustment Date?
Adjustment date is the day when the interest rate on an adjustable-rate mortgage adjusts based on the market conditions.
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What is an Adjustment Period?
Adjustment period is the amount of time between two interest rate adjustments on an adjustable-rate mortgage. Adjustment period could be annually, semi-annually or monthly.
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What is a Convertible ARM?
Convertible ARM is the Adjustable-Rate Mortgage that has a provision allowing the borrower to convert the mortgage to a fixed rate term. The conversion feature is outlined in the mortgage note and has certain restrictions.
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What is a Prepayment Penalty?
A prepayment penalty is a fee charged by the lender for paying off a mortgage before its maturity date. Sometimes a prepayment penalty is also applicable if the borrower pays off extra principle with a monthly payment.
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What are some of the advantages & disadvantage of a loan with prepayments penalty?
Most of the loans with a prepayment penalty offer interest rates that are lower than the loans without a prepayment penalty. The major disadvantage of a loan with prepayment penalty is that it discourages the borrower to refinance the loan if the interest rates drop.
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