CNC Mortgage Blog

Adjustable rate mortgages (ARMs) got a bad name during the heyday of the subprime loans. Many were designed to trick unwary borrowers into unaffordable mortgages once the loans reset to their variable period.

During most of 2007, 2008 and the beginning of 2009 ARMs were at the same levels as 30 year fixed loans so it didn’t make sense to consider them as an option when planning to get a mortgage for your home.

After mid 2009 conditions in the market have changed and ARMs are again worth considering, especially if you need a jumbo mortgage, more than $417,000.

This week rates on a 30 year fixed mortgage were very close to 5.0%, the 3/1 ARM was at 3.85% and the 5/1 ARM at 4.25%. The best 30 year fixed jumbo mortgage was at 6.35%. The 5/1 ARM up to $900,000 was at 5.05% and up to $2,000,000 at 5.35%.

ARMs are known as 1/1, 3/1, 5/1, 7/1 and 10/1 ARMs where the first number indicates the number of years that the loan is fixed, the second indicates the frequency that the loan will vary in years. So a 5/1 ARM is fixed for the first five years and will be variable for the following 25 years changing once a year according to a preset index.

The adjustable part of these loans is based off a margin and an index. Margins are set by the banks when they lend you the money. An index is the rate at which US Treasury bonds are traded or banks charge on the LIBOR (London Interbank Overnight Rate) market. Margins set by the banks are usually between 2% and 3%. The rate for one year US Treasury bond this week was at 0.53%, One year LIBOR was at 1.53%. So if a bank had offered a 5/1 ARM that was resetting now the rate for the next year could be the margin ( 2.5%) plus the index ( 0.53%) and the person would have a rate of 3.03% for the next year.

When you are thinking about a mortgage, an important consideration is the length of time you plan on living in the house or keeping that mortgage. An ARM could go up as much as 6% over the initial interest rate. If you plan to keep your house longer than the fixed period of your ARM, you might not want an ARM. But if there is a possibility that you might change the house due to employment, family size or some other circumstance, and an ARM might be good for you.