Adjustable-Rate
Home Loans

Vision Home Mortgage - Offering Adjustable-Rate Home Loans in Nevada

What is an Adjustable-Rate Mortgage?

An Adjustable Rate Mortgage (ARM) is a flexible home loan option that starts with a fixed interest rate for a set period but adjusts over time based on market conditions. While the initial fixed period varies, an ARM adjusts periodically according to its terms, which means your interest rate—and monthly payment—could go up or down depending on the market. ARMs have caps that limit how much your rate can increase in one adjustment and over the entire life of the loan, offering some protection against large jumps in payments. If you are unsure whether an Adjustable Rate Mortgage is right for you learn more about Fixed Rate Mortgages!

How an Adjustable-Rate Mortgage Works?

The index is a financial benchmark that reflects general economic trends and guides your loan’s future interest adjustments. Margin is what the lender adds to the index to set your interest rate; it covers the lender's costs and profit. The initial interest rate is what you start with and maybe a lower "teaser" rate to make the loan affordable at first. Then there's the note rate, the actual rate tied to your loan.

Adjustment periods define when your rate will change—often once a year after the initial fixed period. Interest rate caps limit how much your rate can adjust each time and over the lifetime of your loan. Some ARMs allow convertibility, letting you switch to a fixed-rate loan for a fee. These features can vary by loan, so understanding them is key to managing an ARM.

Adjustable-Rate Components and Terminology

To understand an ARM, you must have a working knowledge of its components. Those components are:

Index: A financial indicator that rises and falls, based primarily on economic fluctuations. It is usually an indicator and is therefore the basis of all future interest adjustments on the loan. Mortgage lenders currently use a variety of indexes.

Margin: A lender's loan cost plus profit. The margin is added to the index to determine the interest rate because the index is the cost of funds, and the margin is the lender's cost of doing business plus profit.

Initial Interest Rate: The rate during the initial period of the loan, which is sometimes lower than the note rate. This initial interest may be a teaser rate, an unusually low rate to entice buyers and allow them to qualify for the loan more readily.

Note Rate: The actual interest rate charged for a particular loan program.

Adjustment Period: The interval at which the interest is scheduled to change during the life of the loan (e.g., annually).

Interest Rate Caps: Limit placed on the up-and-down movement of the interest rate, specified per period adjustment and lifetime adjustment (e.g., a cap of 2 and 6 means a 2% interest increase maximum per adjustment with a 6% interest increase maximum over the life of the loan).

Negative Amortization: Occurs when a payment is insufficient to cover the interest on a loan. The shortfall amount is added back onto the principal balance.

Convertibility: The option to change from an ARM to a fixed-rate loan. A conversion fee may be charged.

Carryover: Interest rate increases more than the amount allowed by the caps that can be applied at later interest rate adjustments (a component that most newer ARMs are deleting).