Adjustable Rate Mortgage (ARM)
A long term loan usually comes with variable conditions of interest rate like mode of mark up, tenor of interest rate and maximum limit of interest rate in lower and higher tendency of fluctuation. Due to volatilities of mark up rate in market, and higher cost of funds for FIs, it become hard for FIs to offer fixed rate for long term loans like mortgage loan. If they do so, then the cost of fixed rate will be at higher side. Same is happened in mortgage loan market, and this evolved the need of introducing new rate type that is Adjustable rate of mortgage (ARM).
This is a rate, in which lenders hold the right to offer borrowers lower rate of mark up for a specific period. The interval in which mark up rate is changed is variable and base on lender’s conditions. In fixed rate, lenders were helpless in changing the mark up rate. This causes them loss in inflationary propensity of mark up rate. But with the help of ARM, now lender can adjust mark up rate according to market. It has given another look to mortgage loan industry and helped lenders in soliciting more business.
Most borrowers complaining about the complex process of ARM and it is true up to some extent. But ARM deals with lot of working and that is the reason that it becomes difficult for simpler borrowers to understand it. The difference between fixed rate mortgage and adjustable rate of mortgage is another topic and i shall discuss it later.
In ARM, lender offers lower mark up rate for initial period (1 to 5 years) and later on, mark up rate will change annually or semi annually or even in some cases, quarterly. In long term prospective, it is costly way to go with ARM but in shorter period, this is the best option.
For more detail, click here “How does an Adjustable Rate of Mortgage works?”