Jumbo FAQ's

1. What is an adjustable-rate mortgage (ARM)?

An adjustable rate mortgage is a home loan with an interest rate that changes over time. It typically starts with a lower introductory rate, then adjusts periodically based on market conditions.

2. How does an ARM work compared to a fixed-rate mortgage?

An ARM offers a lower initial rate than a fixed rate mortgage, but the rate can change later. Fixed mortgages provide payment stability, while ARMs introduce potential payment variability over time.

3. What are the common types of ARMs (like 5/1, 7/1, 10/1)?

Common ARM types include 5/1, 7/1, and 10/1 structures. These loans differ by how long the initial fixed period lasts before interest rate adjustments begin.

4. What does the first number and second number mean in an ARM (for example, 5/1)?

The first number represents the years the rate stays fixed. The second number shows how often the rate adjusts afterward, typically annually, based on market benchmarks.

5. What is the difference between a hybrid ARM and other ARMs?

A hybrid ARM combines a fixed rate period with later adjustable phases. Most modern ARMs are hybrid loans, offering predictable early payments before transitioning to variable rates.

6. How are ARM interest rates calculated?

ARM rates are calculated using a market index plus a lender margin. When the index changes, the borrower’s interest rate adjusts according to the loan terms.

7. What is an ARM index and margin?

The index reflects market interest rate trends, while the margin is the lender’s fixed markup. Together, they determine the borrower’s adjusted ARM interest rate.

8. What are rate caps and how do they protect borrowers?

Rate caps limit how much an ARM interest rate can increase at each adjustment and over the loan’s lifetime. These caps help protect borrowers from sudden payment spikes.

9. How often do ARM interest rates adjust after the initial period?

After the fixed period ends, ARM rates usually adjust once per year. Some loans adjust more frequently depending on the specific loan structure and lender terms.

10. What happens if interest rates go down during the ARM adjustment period?

If market rates decline, ARM interest rates may decrease at adjustment. This can result in lower monthly payments, offering potential savings compared to fixed rate loans.

11. How do I qualify for an adjustable-rate mortgage?

Qualification depends on credit score, income stability, debt to income ratio, and assets. Lenders also evaluate the borrower’s ability to handle future payment increases.

12. Do ARMs have different credit score requirements than fixed mortgages?

Credit score requirements are similar, but some lenders apply stricter standards for ARMs due to future rate uncertainty, especially in higher cost regions like Washington.

13. Can ARMs have higher down payment requirements than fixed-rate loans?

In some cases, ARMs may require higher down payments, particularly for investment properties or higher risk borrowers. Requirements vary based on lender policy and loan purpose.

14. Are ARMs available for first-time home buyers?

Yes, ARMs are available for first time home buyers. They can be appealing for buyers seeking lower initial payments, especially those planning shorter ownership timelines.

15. Can ARMs be used for refinancing as well as purchasing?

ARMs can be used for both home purchases and refinancing. Borrowers may refinance into an ARM to reduce initial payments or take advantage of short term rate strategies.

16. What are the main benefits of choosing an ARM?

Key benefits include lower starting interest rates, reduced initial monthly payments, and potential savings for borrowers who plan to move or refinance before adjustments begin.

17. What are the risks of an adjustable-rate mortgage?

The main risk is payment uncertainty. If interest rates rise, monthly payments can increase, which may strain budgets, particularly in markets like Washington with higher home prices.

18. Is an ARM a good choice if I plan to sell soon?

An ARM can be a strong option for short term ownership. Lower initial rates help reduce costs if the home is sold before the adjustable period begins.

19. How can refinancing help if my ARM rate increases?

Refinancing can convert an ARM into a fixed rate mortgage or secure better terms. This strategy helps manage rising payments and provides long term financial stability.

20. What should I ask my lender before choosing an ARM?

Ask about adjustment frequency, rate caps, index details, margin size, and worst case payment scenarios. Understanding these factors is essential, especially when buying in Washington.

ARM FAQ's

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