Adjustable rate mortgages feature an interest rate that changes over the life of the loan, with payments increasing or decreasing accordingly. An ARM may be attractive if you need a lower interest rate during the initial stages of owning your home, if you expect that your income will rise in the future, or if you are not planning to stay in the same home for long.

Most ARMs are deeply discounted in the first year. This discounted rate in the beginning enables most customers to obtain a larger loan because they can borrow more money. The rate then usually increases within prescribed limits to a rate that is slightly above the market for fixed rate loans. The loans are limited as to how much the rate can rise in a given period and over the life of the loan. Most ARM’s are self-liquidating 30-year mortgages.

Because the interest rate changes, the monthly payment will also change. Any fluctuation in the interest rate has the effect of lowering or raising the amount of the payment for the next adjustment period. However, the astute customer with periodic increases in income though commissions or bonuses can make payments to reduce the principal balance in addition to making the regular monthly principal and interest payment. This reduction of the principal will result in lower monthly payments, even if the interest rate has increased.

Case Study
A young resident physician has just landed a lucrative position with a local teaching hospital. This is his first salary since busing tables at a local tavern during his undergraduate years. His wife is a paralegal, and they have been living on her salary. However, now that they both have income, the long awaited option of buying a home has finally appeared.

The resident approached one of the doctors in the hospital for neighborhood recommendations. It turns out that the doctor was an EMA customer, and was currently in the process of refinancing his home for the third time through us. The resident had considerable student loan debt, so an important aspect of the decision was the amount of money the couple could borrow, with as little down payment as possible.

EMA suggested a deeply discounted ARM because the resident would be a doctor in two years, with an income of roughly ten times his resident salary. Most likely they would be purchasing another home at that time, as the identity or location of his future employer was not known. The ARM they selected was a six-month LIBOR-based product. It required the lowest payment and enabled them to purchase the home with little down payment. Builder concessions also helped with the closing costs, making this ARM the most economical option.