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Historically the most popular of the non-fixed rate loans, the One Year Adjustable Rate Mortgage (1 Year ARM) has been the flagship of the ARM's for years. The 1 Year ARM has long been marketed as a cost effective alternative to fixed rate loans. The interest may adjust every 12 months depending on the newly calculated rate per the terms of your loan. Depending on the market, your rate could increase, decrease, or remain the same for the coming 12 months. You will not be “blind sided” with information about your new interest rate and monthly payment. The interest rate for the coming year must be calculated 60 days prior to the end of your rate year. Your mortgage lender must notify you at least 45 days before implementing the rate change, which gives you time to refinance your property should you not wish to continue with this mortgage.
The usual five components of an ARM apply and should be examined for any loan you are considering: Start Rate, Index, Margin, Adjustment Rate Cap, and Lifetime Rate Cap. All of these will influence your future interest rates. When you analyze various ARM products available to you, use worse case numbers to project the future of your interest rates. If market conditions dictate that you enjoy a best case result, you win. However, should the interest rate market turn against you, problems, including foreclosure, may result. You must minimize this potential issue and a good analysis of your ARM choices will help you greatly.