An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices. Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).
The adjustment period is the period between potential interest rate adjustments. You may see an ARM described with figures such as 1-1, 3-1, and 5-1. The first figure in each set refers to the initial period of the loan, during which your interest rate will stay the same as it was on the day you signed your loan papers. The second number is the adjustment period, showing how often adjustments can be made to the rate after the initial period has ended. The examples above are all ARMs with annual adjustments--meaning adjustments could happen every year.
It just might be the case that your mortgage is a 3-1 ARM, and after 3 years your interest rate has been adjusted. Being that you have an adjustable rate mortgage (ARM), in order to avoid rate increases in the future, you will have to refinance the ARM to a fixed rate loan. If you want to do so, Bills.com can help you by matching you with up to 4 top tier lenders for free. Just complete this form: Mortgage Refinance Quote, and matched lenders will get in touch with you to discuss your options.
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