Standard ARMS (Adjustable Rate Mortgages)

If you are considering an Adjustable Rate Mortgage (ARM), you need to be aware of the differences so you can select one that fits your financial situation and is within your risk tolerance levels.

ARMs are attached to various indices that dictate the interest rates you will experience during the term of your mortgage. ARMs are available both for buying a home as well as for refinancing one.

If you choose an ARM that is attached to an index that moves quickly, you will be in a good position to benefit from falling interest rates. Of course, you’ll also be impacted quicker by rising ones. ARMs that adjust more slowly provide the benefit of keeping you in a lower interest rate longer, but the opposite is also true.

Here are the most common indices that are used to determine ARM interest rates:

• 6-Month Certificate of Deposit (CD) ARM: The 6-month Certificate of Deposit (CD) index reacts quickly to market changes and offers a maximum interest rate adjustment of 1% semi-annually.
  
• 1-Year Treasury Spot ARM: This is a slower moving rate, as compared to the CD rate, but moves more quickly than the Treasury Average index. It carries a maximum interest rate adjustment of 2% once per year.
• 6-Month Treasury Average ARM: This is one of the slowest moving indices and is often further behind the market when rates change. The program provides for a maximum interest rate adjustment of 1% semi-annually.
  
• 12-Month Treasury Average ARM: This is also a slow-moving index that is behind the others when rates change. It provides for a maximum interest rate adjustment of 2% once per year.