How Do ARM Loans Work? (Adjustable-Rate Mortgages = Lower Rates)

ARM loans allow home buyers access to significantly lower rates vs. fixed rate mortgages. In this video, I explain how ARM loans work, who can benefit from using them, and how today's ARMs are vastly different compared to the products sold in the lead up to the 2008 financial crisis. See below for more details...

Mark Anderson, NMLS# 374393. Vice President, Home Loan Advisor at First Bank, NMLS# 551928. www.first.bank - Member FDIC, Equal Housing Lender
Call or Text me ANYTIME 24/7 @ 314-599-0511 for help with your mortgage.
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This video is offered as a service and the information presented will be of a general nature. The views expressed in this video do not necessarily reflect the opinions of First Bank. First Bank does not provide any warranties whatsoever with respect to any materials or information provided in this video.

HOW DO ARM LOANS WORK?

Modern ARM loans are not fully adjustable. Technically, they are called 'fixed-adjustable hybrid' loans. You will have the option of a 5, 7 or 10 year period where your rate is fixed. This fixed rate is likely to be significantly lower vs. comparable fully fixed rate options. Once the fixed rate period expires, your rate will adjust with market rates at that time based on an index. Our ARM loans mostly use the SOFR index. The calculation to determine your adjusted rate is to take the index and add the 'margin' specific to your particular ARM loan. No matter what happens with market rates at the time of adjustment, you will have the benefit of a lifetime cap, which protects your rate from adjusting beyond a certain threshold.

WHO SHOULD USE AN ARM LOAN?

If you only plan to own the home for a period of time shorter than the fixed rate period on your ARM, you can take the full benefit of the lower ARM rate without ever facing an adjusted rate in the future. Even if you do plan to own the home long-term, it is important to note the fact that you are free to attempt a refinance at any time in the future without paying a prepayment penalty. For my clients, I use a software tool to track my closed loan clients' rates against the market over time. By using this tool, we can identify if there is ever an opportunity to take advantage of a lower rate environment down the road. ARM loans do carry some level of risk; it is possible you will face an adjustment toward a higher rate once your fixed rate period is over. If you are a risk-averse person, ARM loans are likely not a great choice. If you are comfortable with the potential for risk, you can save a lot of money using an ARM.

HOW ARE ARM LOANS DIFFERENT TODAY VS. PRE-2008 OPTIONS?

In the lead up to the financial crisis in 2008, ARM loans often carried a very short fixed rate period while also including prepayment penalties. This combination meant that folks on ARM loans had limited ability to refinance into fixed rate options if the need arose. There were other compounding factors which made ARMs much riskier in the past: weak underwriting standards, incompetent mortgage sales professionals, perverse incentives driving lenders to push dangerous ARM loans, etc. In today's environment, ARM loans carry longer fixed rate periods up to as long as 10 years. Underwriting standards are MUCH tougher. You would also be hard pressed to find an ARM which included any kind of prepayment penalty. For the right candidate, modern ARMs can be a great choice.