• Index Rate Selection:

  • ARM rates are influenced by specific financial indexes, such as the LIBOR (London Interbank Offered Rate) or the U.S. Treasury Constant Maturity Index.
  • Lenders typically choose an index that reflects broader interest rate trends in the financial markets.

• Margin:

  • Lenders add a predetermined margin to the selected index rate to determine the ARM’s interest rate.
  • The margin represents the lender’s profit margin and covers operational costs.

• Initial Fixed Rate:

  • Many ARMs start with an initial fixed interest rate for a specified period (e.g., 3, 5, 7, or 10 years).
  • During this period, the rate remains constant, providing stability to borrowers.

• Adjustment Period:

  • After the initial fixed-rate period, the ARM rate adjusts periodically, often annually or semi-annually.
  • The adjustment period’s frequency is specified in the loan terms.

• Rate Caps:

  • ARM loans typically have rate caps that limit how much the interest rate can change during an adjustment period.
  • Rate caps protect borrowers from sudden, dramatic rate increases.

• Floor Rate:

  • Some ARMs have a floor rate, which is the lowest rate the mortgage can adjust to, even if the index and margin would otherwise result in a lower rate.

• Ceiling Rate:

  • The ceiling rate is the highest interest rate an ARM can reach during its lifetime.
  • It sets an upper limit on how high the rate can adjust.

• Market Conditions:

  • ARM rates are influenced by broader economic conditions, including inflation, central bank policies, and overall interest rate trends.
  • Market conditions can cause ARM rates to rise or fall during adjustment periods.

• Creditworthiness:

  • A borrower’s credit score and financial stability can impact the initial interest rate offered on an ARM.
  • Lenders may offer more favorable terms to borrowers with strong credit profiles.

• Lender Policies:

  • Different lenders may have varying policies for determining ARM rates, including their choice of index, margin, and underwriting criteria.
  • Borrowers should compare offers from multiple lenders to find the best ARM terms.

Adjustable Rate Mortgage (ARM) interest rates are determined by a blend of elements, encompassing current mortgage rates, the Secured Overnight Financing Rate (SOFR) index, and rate caps.

SOFR Index

The New York Federal Reserve calculates the Secured Overnight Financing Rate (SOFR), which gauges the overnight borrowing cost. Our adjustable-rate mortgages’ interest rates are influenced by the 30-day average of the SOFR index that we employ as a key factor.

Caps

Every adjustable-rate mortgage includes an interest rate cap, which sets boundaries on rate fluctuations during each adjustment and throughout the loan’s duration.

• Initial Cap:

  • The initial cap establishes both the upper and lower limits for the interest rate during the first adjustment period.
  • It provides borrowers with a clear understanding of how much their rate can change initially.

• Periodic Cap:

  • The periodic cap defines the maximum and minimum interest rate adjustments at each subsequent rate adjustment.
  • It ensures borrowers have predictable rate changes throughout the loan term.

• Lifetime Cap:

  • The lifetime cap determines the highest and lowest possible interest rates over the entire lifespan of the loan.
  • It sets a long-term safety net, protecting borrowers from extreme rate fluctuations during the loan’s duration.

Important Note: Caps

These caps are represented as a set of three numbers separated by slashes. For instance, in the case of a 5/6 ARM, the caps are denoted as 2/1/5. The first number, ‘2,’ signifies that after 5 years of fixed-rate interest, the initial rate adjustment is limited to a maximum increase of 2%. Subsequent adjustments can only fluctuate by 1% in either direction. The final number, ‘5,’ indicates that the cumulative interest rate variation over the loan’s lifespan is capped at 5%, offering borrowers predictability and protection against drastic rate changes.