 Sam
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 Posted: Thu Apr 08, 2004 11:47 pm Post subject: Initial Interest Rate - The Introductory Rate on an ARM |
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Initial interest rate is the introductory rate that a lender offers on your adjustable rate mortgage (ARM). This rate of interest remains fixed for a certain period of time, say 1, 3 or 5 years. The initial rates on most ARMs including hybrid ARMs are 1 to 3 percentage points lower than that of the fixed rate home loans.
Example: Emily took a 5/1 year ARM of $200, 000 from Jacobs. At the time of loan closing, both the parties agreed upon an interest rate of 6%, which will adjust every year after a fixed rate period of 5 years. The 6% rate is the initial rate of interest for the ARM.
The initial rate depends on economic indicators that are linked with your ARM. It allows you to avail rates which are quite lower than those prevailing in the market. You can also qualify for a larger loan amount since the mortgage rate and monthly payments are low for the initial years. Moreover, if there is a slow down in the interest rate, then you will have to pay much less for your ARM than a fixed rate mortgage.
After the fixed rate period, the initial rate increases or decreases depending upon the economic index tied to the ARM. Some of the popular indexes are the COSI (Cost of Savings Index), COFI (Cost of Funds Index), Prime Rate, LIBOR (London Interbank Offer Rate), etc. These indexes help determine the rates of ARMs at regular intervals of time. |
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