What is initial interest rate for mortgages?


The initial interest rate for a home loan usually goes with adjustable rate mortgages. It holds for limited time and than the rate begins to adjust up or down, according to the movement of the ARM index the mortgage is tied to.

The initial interest rate is also called start interest rate. It is often so low that is actually a teaser rate that lures people into the mortgage without considering the other terms of the loan.

Initial Interest Rates for ARMs Explained

For regular ARMs, the initial interest rate may hold from one to several months. It can start as low as 1.25% but soon it will begin to adjust until it reaches the fully indexed rate (FIR) which is the sum of the ARM index plus the lender's margin. In that respect, you want to make sure you are getting adjustment, periodic and lifetime caps and assess the different scenarios your ARM monthly payment may follow.

ARMs can be particularly difficult to grasp, so lenders have designed the hybrid ARMs that are a little bit easier to understand and allow for greater predictability level. What consumers really like is that hybrids do have lower starting interest rates than FRMs, but exhibit similar stability for limited time - usually from 1 to 10 years. Hybrid ARMs have initial rates that allow for more house, and the buyer can plan on selling or keeping the house while those rates still hold.

Most elaborate of all ARMs, the Option ARM loan, also called Pick-a-Pay and with a number of other names, is perhaps one of the greatest ARM tools ever. They often offer a starting low interest rate of as low as 1% and that will hold until negative amortization limits (usually from 110 to 125%) for the loan are reached and loan is recast.  Option ARMs allow for minimum super low payment rate, as well as for interest-only payments, and fully amortizing payments for different loan periods.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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