The Real Estate Loan Decision Tutorial Service

"Assume the worst and anticipate the solution."
(Harry L. Jensen)

The words "Adjust" and "Adjustable" conveys an intent "to change".

The mortgage borrower must understand that the Adjustable Rate Mortgage (ARM) loan may be amortized over a specific time period (30 years), but the interest rate is not fixed for that time period.

I can say with authority, that the prospective ARM borrower has absolutely no understanding of the ARM amortization process. Many lender representatives lack the basic knowledge required to adequately explain ARM amortization.

Understanding the ARM amortization process is vital to a healthy ARM experience.

ARM loans are fixed for short, specific and defined periods of time. Lender are offering ARM loans that can have a fixed period of 1, 3, 6, 12, 18, 24, 36, 60, 84 or 120 months. In today's mortgage lending world these ARMs can be amortizing or interest only loans.

All ARM loans have components that, in one way or another, controls the ARM borrower's interest rate. The components of an ARM are designed to match the lender's cost of funds, guarantee the "Sevicer" a profit and provide a safety net for the borrower. The primary ARM components are the "Index", that is variable, and the "Margin", that is static.

The ARM loan has evolved into a market sensitive asset. The lender's goal is to match the net ARM yield to the lender's cost to borrow funds. The lower the cost of borrowed funds, the greater the earned ARM profits. ARM loans reduce the risk of investment losses in an increasing inflationary environment, when compared to a fixed rate mortgage.

Fixed rate mortgages have a static yield return, whereas, the ARM loan flows with the yield demands of the market investor. ARM's are suppose to guarantee return over inflation.

Today, investors will not make a move without considering the impact of inflation on the invested dollar. The ARM mortgage has a built in hedge against inflation, but can not control the ability of the borrower to repay the debt. There are risk for both the ARM investor and borrower when dealing with an uncertain economic future. Markets change.

There is a solution to the borrower's ARM risk. It is called "Accelerated Amortization". This solution requires dedication and commitment by the ARM borrower. Amortization acceleration can be useful in controlling monthly ARM loan payment increases.