What are the adjustable-rate mortgage loans (ARM)?

The dynamics of mortgage loans in the United States do not vary much with respect to other countries where this resource is widely accepted.

Thus, Adjustable-Rate Mortgage (ARM) is known as variable or mixed outside our borders. Because it is important to know how they work to find out if they are suitable for you or not, we explain their key aspects.

How do adjustable-rate mortgages work?

An adjustable-rate loan consists of financing whose interest on the balance owed changes from time to time. This is because this value is linked to one or several indexes, which fluctuate depending on various factors.

Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: First years fixed-rate and the rest adjustable: SOFR + margin
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: SOFR + margin
  • Max term: 30 años
Bank of America Adjustable-Rate Mortgage (ARM)

Bank of America Adjustable-Rate Mortgage (ARM)

  • Interest: First years fixed-rate from 5.25% and the rest adjustable: SOFR + 2.75%
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: SOFR + margin
  • Max term: 30 años
Adjustable-Rate Mortgage Refinance

Adjustable-Rate Mortgage Refinance

  • Interest: First years fixed-rate from 5.25% and the rest adjustable: SOFR + 2.75%
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: 5,95% APR for a 10/6 ARM
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: SOFR + diferencial
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: LIBOR + margin
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: Consult
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: 6.50%
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: From 2.50%
  • Max term: 30 años
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: 5.37% fixed for the first 5 years, then adjustable
  • Max term: Consultar
Adjustable-Rate Mortgage (ARM)

Adjustable-Rate Mortgage (ARM)

  • Interest: Consult
  • Max term: 30 años

In the United States the same thing happens with the ARM, but it works more like a mixed interest or hybrid mortgage, since they have a first period in which the interest rate is fixed, and then it changes to a variable rate that can be modified on a monthly, quarterly or annual basis.

Nomenclature of ARM loans

To indicate the fixed and adjustable periods of this kind of mortgages in the United States, there is a way of expressing them that is useful to know what they mean.

Adjustable-Rate Mortgages (ARM)

The most common way is to indicate in the first number the fixed rate period in years and in the second number the time period in which the interest rate will be revised during the variable period (ARM 5/1, ARM 7/1, ARM 10/2).

For example, a 5/1 ARM means that the fixed term will last 5 years and that during the variable term, the rate will be revised every year. In a 10/2 ARM, the fixed rate will be for 10 years and then the rate will change every 2 years until the end of the repayment term.

You may be interested in: Mortgage loans requirements

There are other less commonly used nomenclatures, in which the first digit expresses the fixed term and the second the adjustable term. Inform yourself well before taking out a mortgage to find out which form is used.

How is the variable rate of ARM mortgages calculated?

During the fixed term the interest rate will always be the same, with the monthly payments being constant. However, during the variable or adjustable term, the calculation of the rate is determined from a reference index, to which the bank adds a differential or margin.

Thus, although the value of the index may change, the margin applied by the financial institution is always the same. For an example in which the margin applied by the bank is 1% and the value of the index is 4%, the result is an interest rate of 5%.

If at the next review the index has risen to 5%, the resulting interest rate will be 6%, after adding the spread, which is still 1%.

You may be interested in: Mortgage loans FAQs

What are the most commonly used benchmarks in MRAs?

In the United States, different indicators are used to designate the interest rate related to mortgage loans. The most commonly used options for adjustment tend to be:

  • The SOFR (Secured Overnight Financing Rate). It is currently the most widely used rate for variable mortgages in the United States, replacing LIBOR, which was the most widely used until recently. It is based on transactions in the U.S. Treasury repurchase market.
  • Treasury bills, bonds or notes. Issued by the Treasury, these are low-risk investment instruments guaranteed by the government. They have a low interest rate and can have a duration of less than one year (bills); 2, 3, 5 and 10 years (notes); and up to 30 years (bonds).
  • LIBOR (London Interbank Offering Rate). Linked to the FED rate, it is an important reference for banks. It can be said to be an international indicator that shows the interest rate charged by banks for short-term loans.
  • The Fed Funds Rate or Prime Lending Rate. The most important because it maintains the economic stability of the U.S. and the world. It is the interest rate that banks pay each other to borrow overnight Fed funds.

Differences between adjustable and fixed mortgages

The main distinction between these two types of mortgage loans, as the name implies, is that the interest rate is always the same in fixed mortgages while in adjustable mortgages it has a period in which it fluctuates.

In addition, the initial fixed period of ARM loans usually has a lower rate than that of fixed rate mortgages, being more attractive at the beginning.

Another difference is that fixed mortgages offer greater stability, always paying the same installment every month, with no surprises. In the adjustable ones, when the variable rate period arrives, the amount of the installments depends entirely on the value of the reference index used.

In the event that in the long term the reference index rises, you will save money with a fixed rate mortgage, in the event that it falls, the ARM will be cheaper, but it is impossible to predict what interest rates will do in the future.

Español: Qué son las hipotecas de interés variable o ajustable (ARM)