An Adjustable-Rate Mortgage (ARM) offers a lower initial interest rate, with the trade-off that the interest rate can change periodically, so your monthly payment could go up or down accordingly.
When choosing an ARM, you should consider whether you could afford potentially higher loan payments in the future. An ARM may be right for you if your income is likely to increase or if you only plan on being in the home for three to five years.
Adjustment Period: With most ARMs, the interest rate and monthly payment will remain the same for an initial time period (usually one, three, five, or seven years). After the initial adjustment period, the interest rate can change every year. For example, one of CEFCU's most popular is a five-year ARM. The interest rate will not change for the first five years (the initial adjustment period) but can change every year after the first five years.
Index: CEFCU's ARM interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indices is published weekly in the Wall Street Journal. If the index rate moves up, so does your mortgage interest rate; and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down, your monthly payment may decrease to your rate floor.
Margin: To determine the interest rate on an ARM, CEFCU adds a pre-disclosed amount to the index called the margin. If you're still shopping, comparing one lender's margin to another's can be more important than comparing the initial interest rate because it will be used to calculate the interest rate you will pay in the future.
Interest-Rate Caps: An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:
- Periodic or adjustment caps, which limit the interest rate increase or decrease from one adjustment period to the next.
- Overall or lifetime caps, which limit the interest rate increase over the life of the loan.
As you can imagine, interest rate caps are very important because no one knows what can happen in the future. At CEFCU, a member's loan can only change once a year; your rate cannot adjust to more than 2 percent in a year or 6 percent throughout the life of the loan. All of the ARMs CEFCU offers have both adjustment and lifetime caps. Please see each product description for full details.
Negative Amortization: Negative Amortization occurs when your monthly payment changes to an amount less than the amount required to pay interest due. If a loan has negative amortization, you might end up owing more than you originally borrowed. None of the ARMs CEFCU offers allow for negative amortization.
Prepayment Penalties: CEFCU never charges a penalty for prepayment. Some lenders may require you to pay special fees or penalties if you pay off the ARM early.
Selecting a mortgage may be the most important financial decision you will make, and you are entitled to all the information you need to make the right decision. If you have questions about the features of ARMs, email CEFCU; call 309.633.3424 or 1.800.633.7077, ext. 33424; or visit a Member Center.