Real Estate Glossary

A fully amortized adjustable-rate mortgage (ARM) is a type of home loan where the interest rate and the payment amount can change over time. The term "amortized" refers to the fact that the loan is paid off in equal, regular payments over its life, and the term "adjustable" refers to the fact that the interest rate can change periodically based on a specified index.

The interest rate on a fully amortized ARM is usually lower than that of a fixed-rate mortgage in the initial years, which makes it a popular choice for borrowers who plan to sell the property or refinance the loan before the interest rate adjusts. This is because the initial interest rate will be lower.

The interest rate on a fully amortized ARM is tied to an index, such as the London Interbank Offered Rate (LIBOR) or the Treasury Bill Rate, which serves as a benchmark for the lender to determine the interest rate. The lender also sets a margin, which is a fixed percentage added to the index rate to determine the interest rate on the loan.

The interest rate and the payment amount can change at set intervals, such as every year or every 5 years. The change in the interest rate can affect the payment amount, which may result in it increasing or decreasing. To counterbalance this, the loan's amortization period may also be adjusted to make sure the loan is fully amortized over the remaining period.

Fully amortized ARM's can be beneficial for buyers who don't plan to stay in their home for more than a few years, but they need to be aware that the interest rate can change and make the payment amount increase, which may result in some financial strain. It's important to understand the terms and conditions of the loan, specifically the index rate, the margin, and the frequency of adjustments so that they can be prepared for the changes and make a sound financial decision.