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ADJUSTABLE RATE LOANS
Adjustable-rate mortgages have an interest rate that can change during the life of a loan, with the possibility of both increases and decreases to the interest rate and mortgage payment. Adjustable Rate Mortgages offer the lowest start rates and can adjust either every months, 6 months or every 12 months depending on the program. ARMs are ideal for borrowers who intend to remain in their homes for a short period of time. Borrowers whose financial objectives include lower intitial monthly payments or the ability to qualify for a larger mortgage are also candidates for ARMs. Centurion Mortgage offers a full range of adjustable-rate mortgage products to fit your needs.
3/1, 5/1, 7/1 and 10/1 Fixed Period ARMs
Rate is fixed for the first 3, 5, 7 or 10 years, then shifts to an adjustable rate mortgage (ARM). This loan allows a borrower to retain a lower fixed rate in times where rates are in danger of increasing.
2/28 and 3/27 ARM
These are ARM programs designed to offer lower rates while a borrower rebuilds credit. The loans have rates that are fixed for the first 2 or 3 years, then shifts into a 6 month adjustable rate mortgage. It is a sub-prime program giving you a rate lower than the sub-prime 30-year fixed, and if you have had credit problems, it allows a window of time for credit rebuilding and seasoning. You will then want to refinance this loan.
- Interest-savings in the short-run compared to comparable fixed-rate loans.
- Terms and features to suit almost any borrowers' needs.
- Qualify for higher loan amounts with lower interest rates than comparable fixed-rate loans.
A fixed-period adjustable-rate mortgage (ARM) offers:
- Lower rate alternative to 30 year fixed-rate
- Interest rate cap protection against rapid interest rate increases.
- Extended initial fixed interest periods of three to ten years before the initial interest rate change.
Product summary:
Fixed-period ARMs are tied to either the one-year Treasury securities index or the 1-year LIBOR and offer a stable rate for the first three, five, seven, or ten years. At the end of the fixed period, the interest rate will adjust annually. Initial rate caps vary with product type, but subsequent annual adjustments are capped at 2 percent. Most product types encompass a convertible and a nonconvertible plan; convertible plans offer the option to convert to a fixed-rate mortgage (FRM) after the initial fixed period. Fixed-period ARMs are available for both whole loans and MBS execution.
Benefits
Fixed Period ARMs combine the best features of a fixed-rate and adjustable rate mortgage.
- Lower rates: Offers borrowers a lower initial rate than with a 30-year ARM, and a 30-year amortization. Lower rates mean easier loan qualification.
- Less risk: Fixed-period ARMs offer less risk to borrowers who want a competitive note rate with maximum interest rate protection. And, unlike the 7-Year Balloon, there is no call risk for any of the fixed-period ARMs. Most popular fixed-period ARMs adjust annuallly after their initial fixed interest period.
- Ample time before the first interest rate adjustment: Fixed-period ARMs are a good fit for borrowers who expect to receive salary increases or accumulate assets before the interest rate adjusts at the end of the fixed period.
- Limited payment shock: Fixed period ARMs feature limitations on the upward and downward movement on the interest rate at the initial adjustment, subsequent adjustments and a maximum interest rate over the life of the loan. In rapidly increasing rate environments, initial, periodic and lifetime caps can protect a borrower from payment shock - the inability to meet the mortgage payment, based on the adjusted interest rate.
Key features:
- Competitive Caps and margins
- Standard Index options include 1 year LIBOR and 1 Year CMT Treasury
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Standard Fixed Period ARM Product Types and Characteristics |
| Product |
Index |
Cap Structure |
Assumability |
| 3/1 |
LIBOR, Treasury |
2/2/6 |
Assumable |
| 5/1 |
LIBOR, Treasury |
2/2/5, 2/2/6, 5/2/5 |
Assumable after initial adjustment |
| 7/1 and 10/1 |
LIBOR, Treasury |
5/2/5 |
Assumable after initial adjustment |
| Convertible option available |
The attraction of fixed-period ARMs lies in the combination of fixed and adjustable features that make it a great alternative product to the traditional 30 year fixed-rate mortgage. Typically, the initial interest rate on fixed-period ARMs is fixed for an initial period ranging from 3 to 10 years. This initial fixed rate is also referred to as the initial or "teaser" rate. After the initial period, the interest rate on an ARM adjusts at regular intervals. At the first adjustment, the interest rate can adjust up or down, depending on the index value, subject the lesser of the following:
- Fully indexed rate - the sum of the applicable index value and the margin
- Periodic capped rate - the sum of the initial adjustment rate cap and the current note rate
- Lifetime cap - the stated lifetime ceiling on the mortgage note.
For example, assume the following:
- Index value at adjustment date = 1.90%
- Margin = 3.00%
- Initial interest rate (teaser) = 4.00
- Initial adjustment rate cap = +/-2.00%
- Subsequent adjustment cap = +/-2.00%
- Lifetime cap = 10.00%
At first adjustment, compare:
- Fully indexed rate = 4.90%
- Capped rate = 6.00%
- Lifetime cap = 10.00%
The fully indexed rate of 4.90% is the lesser of these three rates, which will become the borrower's newly adjusted rate. At each subsequent adjustment date, the same calculation occurs.
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