Understanding Adjustable Rate Mortgages (ARM)

For home buyers looking to purchase a house, one of the most important decisions they will make is what type of mortgage loan to acquire. One option is an Adjustable Rate Mortgage (ARM), which can offer certain benefits due to its adjustable interest rate. Let’s look at what an ARM is, how it works, and why it may be a good choice for some home buyers.

What is an ARM?

An ARM is a loan whose interest rate can change during the loan's term. This type of loan usually has a fixed interest rate for an initial period of time and then can adjust based on current market conditions. An ARM typically offers a lower initial rate than a fixed-rate mortgage, so it allows borrowers to afford and purchase a more expensive home initially. It also amortizes over 30 years but with the initial period lasting anywhere from 1 month to 10 years.

How Does an ARM Work

All ARMs have two components, the "margin" and the "index." The margin is set by the lender and remains constant for the life of your loan. The index is determined by external economic factors such as inflation or Treasury bills rates and changes periodically based on these conditions. When your loan adjusts after its initial period, your new interest rate will be equal to the sum of these two components—the margin plus the index—and this will determine your monthly payments going forward.

Should I Choose an ARM Loan?

An adjustable-rate mortgage could be right for you if you plan on living in your home for fewer than 10 years or if you would like to take advantage of a lower initial rate in order to buy more house. Additionally, ARMs are good options if you think current interest rates may drop significantly during the life of your loan; however, keep in mind that there are risks associated with ARMs since they can go up as well as down in response to changing economic conditions.

Understanding Indexes and Caps

Indexes are used by lenders in order to determine the amount at which your ARM loan adjusts after the initial fixed-rate period ends. Common indexes include LIBOR, CMT, and Treasury Bills. It's important to understand how these indexes work in order to understand how much you will pay on your adjustable-rate mortgage after the fixed-period ends.
Caps are limits that lenders place on certain components of an ARM loan such as interest rates and monthly payments so that borrowers do not experience drastic changes in their payments due to sudden large increases or decreases in market conditions. There are two common caps: periodic caps, which limit how much your payment can change each time it adjusts; and lifetime caps, which limit how much your payment can go up over the life of the loan. It's important to understand these caps since they can protect you from large fluctuations in monthly payments due to changing market conditions.

Adjustable-rate mortgages (ARMs) are loans whose interest rate can vary during its term and depending on current market conditions. These loans usually have an initial fixed rate period followed by periodic rate adjustments based on current market conditions, allowing you to purchase more expensive homes than other types of loans such as fixed-rate mortgages might allow for within budget constraints.. Understanding how ARMs work—such as margins, indexes, and caps—is important if you're considering taking out one for financing purposes related to purchasing a new home or refinancing an existing one.


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Mark Villanueva

Home Buyer in Happy Valley

Brian helped my wife and I purchase our first home in Happy Valley. As first time homebuyers, there was a steep learning curve throughout the entire home buying process. Brian was very helpful and patient in explaining not only procedures involved with obtaining the mortgage, but also with anything other processes we had questions about. Brian even came to our escrow signing appointment to give the paperwork a final look. Brian still contacts us every few months to let us know how interest rates are looking and whether it would be beneficial to refinance. Big thumbs up to Brian and we'll definitely use him again when we're in the market for another property.

Sean Curringan

Vancouver Home Buyer

My wife and I have followed Brian from his previous company to him now at U-Mortgage. While his company has changed, his level of service has stayed light years ahead of the rest of the industry and for that, we’re very grateful! Buying a house is for most people, the largest purchase they will ever make, which can be a pretty scary situation. Brian goes above and beyond to ensure that the consumer knows exactly what is going on at all times. This can be as simple as explaining what certain fees are or possibly as complex as how best to boost a credit score. Whatever the case may be, Brian is amazing! I personally don’t know too many Mortgage Guys who go as far as making sure to be present at the final signings. Mr. Spitulski does this and much more. My wife and I plan on using Brian in the future and highly recommend anyone else going through the home purchase process to give Brian at least a shot, it’s well worth it!

R. Rogers


Put your trust into Brian! You can tell he is honest and truly cares about his customers. He worked hard to get us the best possible interest rate (and keep it despite closing taking longer than expected due to an issue the sellers of our new house needed to work out). He patiently worked with us over the course of two years while we paid off debts, saved, and followed his advice to increase our credit scores. Once we were ready to go and found our dream home, Brian got everything mortgage-related done lightening fast! The whole process was so quick, easy and smooth I couldn’t believe it!! He was always quick to answer our millions of questions (this is our first house) and clearly works long hours to make sure his people are completely taken care of. Our experience couldn’t have been better!