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1 Year ARM Mortgage

Adjustable rate mortgages are available today with a fixed initial interest rate that remains for one year up to ten years' duration. A 1 year ARM is generally going to have the lowest initial interest rate. It is also going to be the only option for many would-be borrowers with troubled credit histories. As defaults and foreclosures on subprime mortgages have risen, the lending institutions have begun to tighten up their lending policies. Some banks are no longer willing to accept five or seven year periods of reduced interest rates in an ARM with a borrower who has had a history of credit trouble.

1 year ARM mortgages are used as token enticements by the lenders and as a somewhat artificial reduction in total debt responsibility by the borrower. Because lenders have a cap on what they consider acceptable monthly household debt payments for their borrowers, the 1 year ARM provides a reduced mortgage debt that can be used to calculate household debt. Twelve months hence, the household debt is going to adjust upward along with the mortgage interest rate - but with many lenders, ARMs have been the tool to leverage allowable loan amounts upward.

The real issues with a 1 year ARM are the characteristics of the rate adjustment. The index on an adjustable rate mortgage is the benchmark for all rate adjustments: the starting point for setting the interest rate on the loan for each of the twenty nine years after the initial teaser rate has expired. Index rates are drawn from a variety of well known money market rates, such as the one year Treasury note interest rate. To that figure is added the loan margin, which is the amount that the lender adds to the index to arrive at the interest rate for the ensuing twelve months. Generally that figure is between two and three percent. Thus if the index is 4.90% on a one year Treasury (as it is today) and the margin on your 1 year ARM is 2.50%, your interest rate for the next year will be 7.40%.

There is a balance between the length of the initial interest rate period on an ARM and the margin offered by the lender. The margin should be a little lower for shorter periods such as the 1 year ARM. With such a short grace period, the cap on the annual increase is important, as is the maximum allowable interest rate. A 1 year ARM mortgage has twenty nine years of uncertainty built into it; the cap and the maximum are important for the borrower to project and minimize worst-case scenarios in negotiating the loan.

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updated Monday, December 11, 2017

Mortgage Type Today Last Week Change
30 yr fixed 6.03 6.24   0.035%
15 yr fixed 5.47 5.72   0.046%
5/1 ARM 5.34 5.43   0.017%
3/1 ARM 5.48 5.42   0.011%
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