What's an ARM?: A Mortgage Loan PrimerSheryl Landrum
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Mortgage loans have become quite diverse in the past few years and much of the industry jargon can be confusing. Here are a couple of basic terms you will run into when looking for a mortgage loan today.
What does an "ARM" have to do with my home loan? One of the most common mortgage terms today is ARM. This stands for adjustable rate mortgage. If you have a five-year ARM, your interest rate is fixed for five years and, after that, can adjust up or down depending on current market rates. ARMs normally last three, five, seven or 10 years before adjusting, and can be fully amortized or interest-only. When interest rates drop, so can your mortgage payment; conversely, when interest rates rise, your mortgage payment might too.
What does "interest-only" mean for my mortgage loan? An interest-only home mortgage loan means that you pay interest on the loan but no mortgage principal payment. The benefit is that your monthly mortgage payment is lower, but the downside is that you don't reduce the total amount of your mortgage loan. Interest-only loans are available for ARMs as well as 30- and 40-year fixed rate mortgages.
Why a fully amortized loan? A fully amortized loan payment means you pay off interest and principal, so that the loan is paid off in a specific period of time--usually 30 years. Even with interest-only loans, there comes a time when full amortization comes into effect. A 30-year, interest-only, fixed rate mortgage will set the interest rate over the term of the loan but allow for interest-only payments for the first 10 years. After the 10-year period, the loan becomes fully amortized and will need to be paid off in the next 20 years, causing many to refinance.
Knowing mortgage terminology can help you in the loan process. Stay tuned for more mortgage terms in future columns.
About the Author
Sheryl Landrum is a Senior Loan Officer with First Capital Mortgage in San Diego and Prudential Realty in Bonsall, California.