How do ARM loans work? Can you lock in a rate at anytime? If so, what does it cost (if anything) to do this?

My experince has been that an ARM is used t oget you into a loan at a lower rate than you'd otherwise qualify for. With the understanding that after a specified time, that rate would automatically be adjusted, hence the name.

Locking in a rate cannot be done, to my knowledge. And paying the note early would result in pre-payment penalties: they want the interest as profit for loaning you the money. There is usually a window of opportunity to do a refi, but that's after a predetermined time. Look at your contract. The dates and the estimated future rates are likely all in there.

ARM = Adjustable Rate Mortgage. Although I guess they can go down, all I have ever heard people that have them is the complaint that they go up all the time. Some have caps (in the double digits) and some do not.

I am not a proponent of ARMs (if you haven't guess already) because they get people into trouble. You end up getting more house than you can really afford and when interest rates go up, you are forced to sell - if your market is good - or lose it all. Did you see the story last week about record mortgage defaults?

Find a good lender and get a fixed rate. That way you don't get a nasty surprise in your mailbox that your mortgage is going up $500 per month, again.

I was always told to Stay Away from them... I think you can lock in a rate if you refinance, but that can be costly, and I agree with the captain, I think it is only after a certain time.

I think it is worth the extra 1.5 % or whatever the difference is to know exactly what my mortgage payment will be every month.

I agree with the previous posts. When ARMs first came out in the early 80s, their intent was to have the borrower share some of the risk with the lender, that rates would increase in the future. For taking on that added risk, the borrower was given a lower rate for a period. The "Margin", which is the percentage added to the "Index" (1 yr T-Bill and others) to determine the actual interest rate on the loan was as low as 1.25%. Today the margins are at least 2.625% and above. The 3/1, 5/1, and 7/1 ARMs used to give a substantially lower rate for the fixed period (3yrs, 5 yrs, 7 yrs). They no longer do. The pricing on ARM products (FNMA Conforming) is actually WORSE than for a 30 year fixed rate. Anybody today would have to be insane to consider an ARM. I am disgusted with the mortgage industry.

Ok... Let's all calm down on the ARMs. Like most things, there are good ones and bad ones. Here is how they work. There are as stated above, 1 year arms ( which means that the rate will change annually) 3/1 arms, the rate stays the same for 3 years and then changes yearly, 5/1. 7/1 and 10/1. They operate like the 3/1 staying fixed for the either 5, 7, or 10 years and then changing annually.

ARMS have "caps". Which means that there is a limit to how far they can climb. Most caps are 2 and 5. That means the rate cannot change more than 2 points in any give year and no more than 5 points over the life of the loan.

So you will see in your disclosures caps as 2/5. That's what that means. However some Arms will say caps as 5/2/5. That means they can change up to 5 points on the first adjustment, then 2 points annually with a max of 5 points after the initial change. BE VERY CAREFUL of those.

Now, the adjustment is based on the index plus a margin. The index is usually the rate of either the T Bills or the Libor. So if the Tbill is at 8%, and the margin is 2.625 your new rate could conceivably be 10.625. But if your start rate was 5% the max you can be is 7.625. Unless you have the 5/2/5, when you could go to 10%. ( You won't go to 10.625 because you can't go more than 5 points.)

Usually, there will be a prepay penalty if you want a smaller margin.

ARMS are not always a bad thing. Depends on the market. My first mortgage was an FHA ARM. At the time is was 4%. It had 1 point annual caps and 5 lifetime. I was always under the standard conventional rate. Incidentally, the rate will go down if the index and margin add up to a lower rate. They are also OK for people who are not going to stay in property for a long time.

Some arms are "convertible" which means for a fee you can lock in to a fixed rate within so many months of obtaining the arm. There usually is a fee to lock in. The other arms would have to be refinanced to get a fixed rate.

I hope this gives you some basic info. Please discuss in further detail with your loan officer to find the program right for you. I have not been dooing many arms this year. The rates are about the same as the fixed rate.

Diane has provided a great deal of pertinent information, the accuracy of which is unquestioned. In years past various ARM product were of benefit to particular borrowers. In the current mortgage climate however, I cannot find a single ARM product that I could recommend. My rail against the mortgage industry was prompted by the fact that it created the sub prime products which allowed anyone with a heart beat to get a bad loan with a prepayment penalty, and for creating the multitude of "Disneyland" loans which were beyond the comprehension of most A+ borrowers. Their business model was predicated on the assumption that the home appreciation gravy train would last forever ("The Greater Fool Theory). Perhaps I have just grown too old and cranky.