Is ARM the type of loan you need

Jan. 5, 2011 - PRLog -- Adjustable Rate Mortgage or ARM is the type of loan which is lent to finance the private ownership of the property with a floating or changing interest rate throughout the term. ARM is not to be mixed up with the GPM (Graduated Payment Mortgage), in which variable payment amount is offered but with a fixed interest rate. ARM is one of the major types of

Mortgage loans; the other major type being Fixed Rate Mortgage (FRM). In FRM, the interest rate does not change with the change of market index over the mortgage life. In ARM, the interest rate on the loan is so often attuned according to the market index. Some of the most commonly used interest rate indices are constant-maturity Treasury (CMT) securities, London Interbank Offered Rate (LIBOR) and the Cost of Fund Index (COFI) but there are lenders who prefer their own cost of funds as indices.

In ARM, the risk transfers from the lender to borrower as the interest rate varies, yet it is favorable in the situations where fixed rate mortgage loans are very expensive and difficult to obtain. If the interest rate increases, the borrower faces the loss and vice versa.
As the interest rate alters, the payments completed by the borrower may alter on each occasion. If the payments are made to be constant, the term length of loan changes with the varying interest rates. ARMs are of various types - http://www.canadabanks.net/default.aspx?article=ARM+-+Adj....

•   Hybrid ARM: It is a mixture of fixed and floating rate mortgage loan. Initially the interest rates are kept constant for some period and then later it is adjusted according to the market indices.
•   Interest-only ARM: In this type, the borrower only makes the interest payments on the mortgage.
•   Option ARM: It gives the borrower an open choice between the interest-only payment and minimum payment. Minimum payment is lesser than interest-only payment but if the monthly payment doesn’t cover the interest, the mortgage is negatively amortized. In the Option ARM, the interest rate is adjusted monthly but the payments are made annually.

The character of ARM is decided by the interest index and the limitation on charges. The characteristics of ARM are:

•   All ARMs have the interest rates based on the indices. In some countries, prime lending rate is issued by the banks to use as indices. The indices may be applied directly, on a rate plus margin bases or depending on the index movement.
•   If the mortgage payments made by the borrower increase with time increasing the financial difficulty risk on him, caps are applied. Caps are the limitation on the charges and are the common feature of ARMs; they are applied on the frequency of the interest rate change, recurring change in interest rate and sum change in the interest rate over the loan life. - http://www.canadabanks.net/Mortgages.aspx

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