Adjustable Rate Mortgages are back

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ARMs, or adjustable rate mortgages (mortgages that do not have a fixed rate), can be scary, but if you stay within your time line, it can save borrowers a lot of money when rates are on the rise.

The most popular adjustable rate mortgages are the 5/1 ARM with 5/2/5 Caps, Margin 2.25, and the 7/1 ARM with 5/2/5 caps, Margin 2.25. What his means is that the payment will be spread over 30 years but the rate will be fixed for the first 5 or 7 years. Once the fixed time frame is over, the mortgage will adjust annually to whatever the market rate is plus a margin of 2.25, which represents the profit for the bank.

Why would a borrower take an adjustable rate as opposed to a fixed rate? To save money. Usually, the rate difference between a fixed-rate and a 5-year ARM is 3/4 percent lower. On a $200,000 loan, this is approximately $75 less per month, $900 annually and $4,500 in savings for the 5 years.

This program is usually good for a first-time homebuyer who may only stay in the property three to four years before selling and moving on to their next property. So if a borrower takes this loan and ends up selling before the adjustment period, he/she has no risk because they will not incur the adjust period.

If a borrower goes beyond the 5 or 7 years and has an adjustment, then the rate on the first adjustment can go up to (but it doesn’t have to) 5 percent over the start rate on the first adjustment, 2 percent for every year after, and a 5 percent mamixum lifetime over the start rate. Hence the 5/2/5 caps.

So for example if the start rate is 3.625 percent, the rate could go up a maximum of 8.625 percent. That could be an increase in payment of over $600 per month.

If a rate was adjusting today, the 1-year treasury rate of .82 plus a margin of 2.25 percent would bring the rate for the next 12 month period to 3.07 percent. The big question is where will rates be at in the future?

ARMs can be a big cost savings but beware of the adjustment and the adjustment periods.

To contact me, call 773-557-1000 ext. 15, e-mail or visit

About Ron Ricchio

Renato (Ron) Ricchio is president of Chicagoland Home Mortgage. He grew up in Westchester and attended St. Joseph High School and DePaul University, taking a job as a loan officer in the mortgage industry soon after graduating with a bachelor's in finance in 1991. He started his own company in 2001, which he operates today. He has been ranked in the top 150 loan originators in 2010 and 2011 by Origination News. Ron is happily married with three beautiful children. A board member of San Francesco Di Paola Society and the founder of Ricchio Family Toy Drive for Lurie's Children's Hospital, he enjoys cooking and spending time with family and friends.

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