NJ Loan Programs: Will an Adjustable-Rate Mortgage (ARM) Work for You?

The adjustable-rate mortgage (ARM) has been a popular NJ loan program because in general, they start with a lower interest rate and lower monthly payment than a traditional, 30-year fixed mortgage. However, as the name of the loan suggests, the interest rate can and usually does change during the life of the loan. Here are few factors to consider while you are searching for NJ loan programs and are thinking about an ARM.

NJ Loan Programs: The ARM and the Adjustment Periods

All ARMs have adjustment periods that are built into the contours of the loan. These adjustment periods determine when and how often the interest rate can change. However, there does exist an initial period in which the interest rate cannot change. The length of this initial time varies – it can be as little as the first six months to as long as the first ten years. But one thing is certain, after this predetermined initial period, ARMs adjust based on fluctuations in interest rates. As a result, this is extremely important when considering NJ loan programs.

NJ Loan Programs: How Does the ‘Index’ and ‘Margin’ Affect the ARM?

When the initial period is over and at every predetermined adjustment period, the interest rate will change based on two elements: the ‘index’ and the ‘margin.’

• Index: Interest rate adjustments are based on a published index. The two most common indexes used are the London Interbank Offered Rate (LIBOR) and the U.S. Constant Maturity Treasury (CMT). The index reflects current financial market conditions and is essentially why your ARM interest rate can change at each adjustment period.
• Margin: This is the percentage that can be added to the index. Based on these two factors: the ‘index’ and the ‘margin,’ the interest rate on your mortgage can increase or decrease.

NJ Loan Programs: Caps, Ceilings and Floors

The ARM NJ loan program will always have rate caps, also termed ‘ceilings’ and ‘floors.’

• Caps: This term refers to how much the interest rate can increase or decrease at each adjustment period and over the life of your loan – thus the ‘ceiling’ (highest) or ‘floor’ (lowest) of the interest variability.

NJ Loan Programs: “Hybrid” ARMs

This type of ARM has a fixed interest rate for a certain period of time and then the interest rate adjusts for the remainder of the loan, like a conventional ARM. There are several forms of this type of NJ loan program.

NJ Loan Programs: Additional Considerations

Since the initial interest rate of an ARM is usually lower than that of a fixed-rate mortgage, you may qualify for a larger loan amount. This can benefit you greatly if interest rates are high when you initially set up your mortgage and then subsequently drop during your adjustment period, thereby decreasing your monthly payment. But a word of caution, a decrease is not a dependable option since the market is always fluctuating, so don’t base your choice of NJ loan program on this fact.