The acronym ARM stands for Adjustable-Rate Mortgages. This type of mortgage is to be offset against the normal Fixed Rate Mortgage. The essential difference then is in that the ARM has an interest rate that will or at least can change up or down during the life of the mortgage. Not so with the Fixed-Rate Mortgage – its rate is guaranteed to remain where it is until the buyer has fulfilled his or her part of the mortgage agreement. Usually the surety of the Fixed Rate is good, but it can, in times of falling interest rates, be a serious detriment.

So, the payments on an ARM cannot only increase with variance in the escrow, but the note payment itself can vary. The amount of change and the frequency with which it can change is limited according to the individual ARM itself, fixed at particular intervals, and any such variance is not at the banker’s whim or discretion (The rate is usually fixed for at least the first two years of the loan). Rather, the adjustments are hinged in legal fashion to the federally controlled cost of borrowing. When that index goes up for that particular quarter or period, the interest rate on this loan follows suit. Likewise, when the feds money goes down, so also does this ARM. So the interest rate on the ARM is hinged to federal interest rate indexing which measures the lender’s cost of borrowing money and doing his business.

There are several different indexes that might be used and one is usually more volatile than another. Just exactly how the loan is fixed to the money index may vary with the lender and with this particular loan product. In consideration of this, it is a good idea to research your ARM carefully before you commit yourself.

The ARM’s interest rate is calculated by adding the index (the lender’s cost for the money) to what is known as a margin, or their margin of profit. Whereas the index fluctuates as much as five or six points, the margin is usually two or three percentage points. It, too, will vary from one lender to the next and from package to package.

Like the Fixed Rate, the ARM is not usually a balloon, but it is meant to be paid off completely.

The term “Alternative Mortgage Instrument” (AMI) is used for any other type of mortgage other than the traditional Fixed Rate Mortgage which has been so popular. Some examples of AMIs: the Adjustable Rate Mortgage, Rollover Loans, Graduated Payment Mortgage, Growing Equity Mortgage, Shared Appreciation Mortgage.

Is there such a thing as “no-cost loans” as some advertise?

“Caveat emptor” - Let the buyer beware. As in life in general, there are no free lunches for customers in the mortgage industry, and anybody who says so is selling something. Something else. At best the advertiser is intentionally misleading his readers. Always read the fine print before you sign. What sometimes happens in these instances is that these mortgage lenders repackage the loans to disguise up-front charges, known as “points” (one point is equal to one percent of the original loan amount) as is the common vernacular in the mortgage industry. And so these types of lenders tell their customers theirs is a no-cost loan. But instead of getting something for nothing, the mortgagee is simply paying a higher interest rate than he otherwise would be paying.

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