Home owners and prospective home owners will almost certainly have heard a lot about adjustable-rate mortgages, called ARMs for short. Adjustable-rate mortgages are a popular form of home loan that links the amount of the interest rate of your loan to various indexes. The benefits of an ARM are, therefore, felt when interest rates fall, resulting in smaller monthly payments. That's when people with ARMs are very glad they chose the type of home loan that they did. The flip side of an adjustable-rate mortgage is that when index rates rise so does the interest rate on the loan - thus, monthly payments go up, taking a bigger and more painful bite out of your wallet. The key is the rate movement of the ARM, either up or down, which the index pegged at. There are multiple indexes out there that an ARM interest rate can be linked to.
Banks, credit unions, and other financial institutions in the business of making home loans will link their interest rates to several well-known financial indexes. Some of the best-known indexes are the federal funds rate, the discount rate, the overnight LIBOR, Freddie Mac 30/60, Fannie Mae 30/60, 6-Month LIBOR, 10-Year Treasury Security, and the WSJ Prime Rate. These indexes are updated all the time, and your bank or lending institution can link the interest rate to one of these indexes. If you want to get a sense of how your monthly payments on your adjustable-rate mortgage are going to change, you should find out which index your loan will be linked to - of course preferably before you apply for the mortgage.
Before you take out a mortgage loan, whether it's an ARM, a fixed-rate mortgage, or any other kind of home loan, make sure you discuss your plans and your options with a financial advisor. He or she can provide you with invaluable advice and suggestions on what is best for you.
