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Finance: What is Adjustable-Rate Mortgage (ARM)? 17 Views


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Description:

What is an Adjustable-Rate Mortgage (ARM)? An adjustable-rate mortgage is a mortgage that has a changing interest rate. Whatever it changes to is based on a pre-specified index and happens on a consistently periodic basis (monthly, yearly).

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Transcript

00:00

Finance allah shmoop What is adjustable rate mortgage or arm

00:08

Well here's an arm and here's a leg and that's

00:11

What Renting the money to buy a home costs you

00:14

Yeah Okay Eight r m stands for adjustable rate mortgage

00:17

The rate well that's The interest cost of the money

00:20

or the cost of renting that money to buy the

00:23

home Well the rate isn't it fixed in this case

00:26

like five point seven percent for thirty years Where you

00:28

know in advance that your monthly payments going to be

00:31

nine hundred forty three bucks a month or whatever it

00:33

is that would be a fixed mortgage a fixed number

00:37

You can count on it for all three hundred sixty

00:40

payments And then the house is all yours So that's

00:43

fixed then what's adjustable like yes the interest rate changes

00:47

But how does it change Well in a standard arm

00:50

there is some global standard on which the rates are

00:53

often price like lie bore the london interbank borrowing offering

00:57

rate It's one of the key things that price is

00:59

the cost of renting money all around the world with

01:02

the actual rate of libel or is generally reserved for

01:04

banks like super cheap cost of renting money to banks

01:08

who are very likely to pay back the money with

01:11

no hassle that rate is more or less what banks

01:14

pay for running the money along with blue chip customers

01:16

in real life The banks then mark up a premium

01:19

on top of the rate that they're paying to rent

01:22

the money to themselves And then they resell or re

01:26

rent that money teo their prized customers So the pricing

01:30

of bank my views in renting money to joe six

01:33

pack could be something like lie boer plus three percent

01:37

or three hundred basis points So if libel or is

01:40

it didn't say two and a half percent today the

01:43

adjustable rate might be five and a half percent and

01:46

all that's great honor given alone It might mean that

01:48

for a while you're paying seven hundred twelve dollars a

01:51

month for your house payment wonderfully cheap and in fact

01:54

banks market these low rates initially to help people be

01:58

able to afford tto by that new home and live

02:00

of the dream You know the american dream usually with

02:03

an arm there's a teaser rate that starts really low

02:07

Like at live or live or plus ten basis points

02:11

or something like ridiculously cheap for six months or a

02:14

year something like that Then it has an incremental set

02:17

of step ups in interest costs and venit adjust with

02:21

the markets usually upward maybe upward by a lot Remember

02:26

there's a reason it's called a teaser rate but then

02:29

if we get inflation or a you know just bank

02:32

nervousness for there are weird effects from brexit or the

02:35

volume of transactions going through london or something weird happens

02:39

Well then the liquidity drops and interest rates rise So

02:44

now lie board goes up and up and up to

02:46

four and a half percent and wealth contractually in your

02:50

mortgage paperwork you have to pay live or plus three

02:53

hundred basis points no matter what So now that's seven

02:56

and a half percent interest on the dough you borrowed

03:00

and well we're that toe happen It's likely that your

03:02

monthly payment has skyrocketed from seven hundred twelve dollars a

03:06

month is something more like twelve hundred dollars a month

03:09

or more Can you handle that big of a payment

03:11

Well have you done a fixed rate loan at nine

03:13

Hundred forty three dollars a month Well you'd still be

03:15

paying on that number but you rolled the dice with

03:18

an arm and now you owe big bills There go

03:22

that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh

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