Home Loan Tips: What Is A 1-year ARM?

ARM is the terminology used to describe an Adjustable Rate Mortgage. With this type of mortgage, the interest rate will fluctuate during the life of the loan, based on the terms of the loan agreement and market conditions. With a one-year ARM, your interest rate will be locked in at the initial rate for a period of one year following the time you take out the loan. After one year, the rate will change, based on the external index, such as the Constant Maturity Treasury Index (CMT), that impacts your particular loan.
If you are thinking about getting a 1-year ARM, there are a number of factors that you need to consider.
The Period of Fixation
When the agreement for the ARM is made, the period of adjusting the interest rate according to whatever external index chosen is also fixed. With a one-year ARM, the period during which the interest rate is locked is one year. A 7 year arm is (you guessed it) fixed for a period of 7 years. ARMS are available in many different lengths, and are typically discussed in terms of the length of time for which the interest rate is locked. Typically, the shorter the period that the rate is locked for, the lower the rate. However, shorter loan periods are far riskier because if you are required to sell when your rate adjusts, you could be in trouble if rates go up, and you can no longer afford the new interest rate.
The Interval of Adjustment
The interval of adjustment represents how often the adjustments of the rates of the home loan mortgage can be made after the lock-in period is over. This typically varies anywhere from 6 months to 5 years, and is specified in the original loan agreement.
Depending upon the interval you agree on, the interest rate on your loan will be revised periodically after the initial adjustment. For example if the adjustment rate is fixed at two years interval, the one-year ARM would be first revised after the lock-in period was over (in this example this is one year) and then again revised after two years. The interest rate will continue to be revised according to whatever external index you chose, every two years.
Caps for Interest Rates
Do not even consider an ARM that doesn’t include a cap on the interest rate. This is a safeguard for both the lender and the borrower to ensure that they are protected against excessive increases in the interest rates (borrower) or large decreases in the interest rates (lender).
The caps represent agreed upon minimum and maximum interest rate right at the beginning of the ARM home loan mortgage. This means that no matter what the external index says, the rates of interest will not go higher or lower than the caps (agreed minimum and maximum rates) they have agreed upon.
As a general rule, you should try to estimate the longest amount of time you think you will own the home, and get an ARM that is fixed for a year or two longer than that. That way, you have a lower risk of having rates go up on you before you decide to sell.
There are many more factors that influence the ARM home loan mortgage. Make sure that you completely understand the terms of any mortgage loan before you sign an agreement, and be sure that you are working with a reputable mortgage lender at all times.