Adjustable Rate Loans

Adjustable Rate Mortgages — ARMs, as they are also called — come in even more varieties. Generally, ARMs determine what you must pay based on an outside index, perhaps the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank’s 11th District Cost of Funds Index (COFI), or others. They may adjust every six months or once a year.

Most programs have a “cap” that protects you from your monthly payment going up too much at once. There may be a cap on how much your interest rate can go up in one period.  For example, no more than two percent per year, even if the underlying index goes up by more than two percent. You may have a “payment cap,” that instead of capping the interest rate directly caps the amount your monthly payment can go up in one period. In addition, almost all Adjustable Rate Mortgage programs have a “lifetime cap” — your interest rate can never exceed that cap amount, no matter what.

Adjustable Rate Mortgages often have their lowest, most attractive rates at the beginning of the loan, and can guarantee that rate for anywhere from a month to ten years. You may have heard of loans that are called “3/1 ARMs” or “5/1 ARMs” or the like. That means that the introductory rate is set for three or five years, and then adjusts according to an index every year thereafter, for the life of the loan. Loans like this are often best for people who anticipate moving — and therefore selling the house to be mortgaged — within three or five years, depending on how long the lower rate will be in effect.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on either moving, refinancing again, or simply absorbing the higher rate after the introductory rate goes up. With ARMs, you do risk your rate going up, but you also take advantage when rates go down by pocketing more money each month that would otherwise have gone toward your mortgage payment.

Outside of the loan term, you may experience stumble upon conforming loans and nonconforming loans as you investigate the many options that ARM offers.

Conforming loans are mortgages that have specific criteria that allow them to be distributed my Fannie Mae and Freddie Mac. If you are a lender, you can sell these mortgages as they originate from government entities for redistributing on a secondary mortgage market. So they may be redistributed to you as a Colorado resident by the government through Sierra Pacific Mortgage.

There are certain nonconforming categories that these loans fall into. If the loan doesn’t meet a certain criteria than it is placed accordingly. Also make sure you speak with your lender or financial advisor so you know all the potential pitfalls of nonconforming loans. Many originators of these loans have a good standing reputation while there are others out there that will be ill advised. Always make sure to read the fine print of the nonconforming loans. Make sure you understand rate resets and how they function.

Refinancing an ARM

An ARM is the better option if interest rates are higher. During the introductory period you will have a the opportunity to see a lower rate. This mortgage is the better option if you can pay down your loan with a low interest rate or act before the initial period is through

You may be considering refinancing your ARM (also known as a rate and term refinance) if you:

  • Want a shorter loan term
  • Are eligible to receive a fixed lower interest rate than your current payment on your ARM.
  • If your going through a divorce and need to remove an individual
  • If you want the benefit of managing a budget of a fixed rate loan
  • Do you have sufficient equity on your home? Take cash out of your home.
  • Maybe your ARM introductory period is ending and you want to avoid interest rate increase thus giving you a larger payment

Suggestions to refinance an ARM to a fixed rate mortgage

Those you decide to refinance from an ARM to a fixed rate mortgage will enjoy a relatively simple process. This is great news! The process is very similar to when you purchased your first home.

In refinancing, you take out another loan that is used to pay towards the original loan. After this, you begin making payments towards the new mortgage. You can use any lender and it does not have to be the same as your original. Because of this, you are able to shop around to get the best deal before obligating to one or another.

Sierra Pacific Mortgage is your choice for refinancing an ARM to a fixed rate mortgage in Colorado. As a quality mortgage lender, we pride ourselves on ensuring you get the best possible service from our loan officers to our underwriters. We will evaluate your assets, debt, credit score and give you the most honest information and options available.


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Sierra Pacific Mortgage NMLS# 1788. Michael Shotnik NMLS: 218281, CO License: 100017466. Not licensed in Alaska or New York.  To check license status of mortgage loan originator, visit D.O.R.A. and NMLS consumer access.