Adjustable Rate Mortgages

An adjustable rate mortgage is an ideal option for you if you are planning to relocate for work or are planning to expand your family in the next few years. It offers you lower payment than what a 15 Year Fixed Rate Mortgage or 30 Year Fixed Rate Loan offers for buying or refinancing your home.

Adjustable rate mortgages are mortgages for which the interest rate may fluctuate over time. The majority of this type of mortgage loan adjusts once annually until the original loan balance has been paid in full. It is important to note here that some of these loan types adjust every six months, but they are uncommon. The most prevalent ones are the annual adjustment ones. Some of the adjustable rate mortgage loans also have a conversion feature. This feature will allow you to convert the loan from adjustable to a fixed rate. There is a very basic charge to convert.

How do index and margin work?

With 5Star Lending’s adjustable rate mortgages, you enjoy paying low interest and payment for a fixed term of 3, 5, 7, 10 year fixed term. Adjustable rate mortgages (ARM) offer lower initial interest rates than fixed rate mortgages. As the initial interest rate on adjustable mortgages remain fixed over an opening period of time, typically ranging from 3 to 10 years, you can plan accordingly. After the introductory period ends, your adjustable rate mortgage will change depending on the current index.

The lenders use the index and the margin to calculate your new interest rate when it’s time for it to adjust.

Your Interest Rate= Index + Margin

The index is a benchmark interest rate that reflects general market conditions. It is these changes in the index amount that drive the changes to your interest rate.Well-known indexes include the London Interbank Offered Rate (LIBOR) and the Treasury Constant Maturities index.

The margin is set by the lender when you apply for a loan, and this amount generally won’t change after closing.The margin amount depends on the particular lender.

Let’s take a look at this example:
Let’s say we offered you a 5/1 ARM with an initial rate of 3.75% percent and an adjustable rate of LIBOR (the index) + 2.25% percent (the margin).

In this case, 5/1 means that the initial rate of 3.75% will be fixed for the first 5 years, and the rate will adjust every year starting in year 6.

At the beginning of the sixth year of your loan, your rate will adjust. Let’s assume that the One-Year LIBOR index is 2.5% at that time. Your new rate when this mortgage begins to adjust will be 4.75%. Here’s the math:

2.5% (LIBOR) + 2.25% (margin) = 4.75% (your rate)
At the beginning of the seventh year of your loan, your rate will adjust again (and every year thereafter).
Now, let’s assume the LIBOR is 3%. Your new rate would be 5.25%.
3% (LIBOR) + 2.25% (margin) = 5.25% (your rate)
With this loan, whenever the one-year LIBOR index is higher than 1.5%, you will have a higher interest rate than your original rate.

Many homeowners choose adjustable rate mortgages as they consider it the best option for financing their dream home. Especially, jumbo loan borrowers can save hundreds of dollars a month by choosing adjustable-rate mortgages, or ARMs, which normally have lower interest rates than fixed-rate mortgages. That’s why the majority of jumbo borrowers opt for ARMs.

At 5Star Lending, we make it easier to make the process of acquiring this mortgage quick and painless. We will help you receive options based on your unique criteria and scenario. We will help you compare interest rates and terms before making the final decision.

Our adjustable rate mortgages are beneficial for

  • Those who need to keep their interest rate and payment low
  • Those who relocate for work for a few years
  • Real estate investors who require loans to purchase properties, renovate them or resell them
  • Growing families looking to buy a larger home in future

Contact 5Star Lending today if you want to know whether our adjustable rate loans are suitable for your needs or not. We will help you determine the best loan option to meet your needs as we understand your needs better than anyone else.