Wednesday, July 15, 2009

The Mechanics of Adjustable Rate Mortgages

the interest rate on Adjustable Rate mortgages originated in the united states must be tied to a published index of interest rates that is beyond the control of the lender. the most common indexes are averages of U.S. treasury rates and average cost of funds for thrift institutions. At a predetermined change date, the loan interest rate will fall or rise as the index falls or rises.
when the Adjustable Rate mortgage Market first began to develop in the early 1980s in response to high and volatile interest rate, lenders and borrowers experimented with numerous ARM designs. Between 400 and 500 different types of ARM products were being offered in early 1984. over time, the terms of Adjustable Rate mortgages have become more uniform. One of the most popular is a one-year ARM based on a 30-year amortization. with a one-year ARM, the initial contract rate remains in effect for one year and adjusts annually thereafter.

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