What Are Adjustable Rate Mortgages?

Adjustable rate mortgages, sometimes called variable rate mortgages, are home loans where the interest rate can be adjusted by the lender according to preset terms. If you're planning on buying a home and really need lower monthly payments, ARMs are a great alternative to fixed rate mortgages. Community Bank of Bergen County NJ offers adjustable rate mortgage loans that have lower interest rates for a set amount of time.

How Adjustable Rate Loans Work

Community Bank has 5-, 7-, and 10-year adjustable rate mortgages. The number tells you how many years the loan will have a fixed rate before the adjustment period begins. This is known as the initial rate period and is an important selling point with these type of hybrid ARMs. Once this period ends, we may increase or decrease the interest rate based on rate indexes like CMT, COFI or LIBOR. After the initial rate period, ARMs are usually adjusted yearly.

Caps on Adjustable Rate Mortgages

In order to protect borrowers like you, lenders may not increase ARMs by more than a certain threshold. There are three different types of interest rate caps:

• Initial adjustment cap. The initial adjustment on your ARM occurs right as your initial rate period ends. Our cap for this one-time change is 2%, but it can be as high as 5% at some banks.
• Subsequent adjustment cap. Subsequent changes can occur to your ARM during regular intervals after the initial adjustment, usually once a year.
• Lifetime adjustment cap. This is the total percentage your interest rate can increase over the entire lifetime of your mortgage. For most lenders, this cap is 5%. That means if your initial interest rate is 4%, the max interest you can be charged at any time is 9%.

In addition to caps on interest, there are usually caps on how much your monthly payments can increase as well. Read the terms of your ARM carefully to find out what the specific caps of your loan are.

It's difficult to predict exactly how much your interest will change over the course of your loan when you get an ARM, so keep that in mind when considering this type of mortgage. Factors like negative amortization and prepayment penalties may also affect your decision. Contact a representative from Community Bank of Bergen County to help you choose the right option for your needs and budget.