According to The New York Times:

In August, the New York Mortgage Company began marketing an ARM that offers borrowers long-term protection against interest-rate increases, while still allowing them to benefit from decreases.

The company’s Homeowner Protection ARM is a 30-year loan with an interest rate that starts at 6.5 percent, then resets monthly according to the London Interbank Offered Rate [the LIBOR rate, as it is commonly known as], a short-term interest-rate index.

But unlike most ARM’s, whose interest rates can rise to a maximum of about 13 percent, the Homeowner Protection ARM has a maximum annual percentage rate of about 7 percent for the first 10 years.

Should the London Interbank index drop, though, the interest rate on the loan would do the same, down to a floor of 4 percent. After 10 years, the interest rate ceiling would rise to 10 percent.

There are several advantages to an adjustable rate mortgage loan such as this. First, the adjustable rate may be lower than the current fixed rate, of course. Second, the loan cannot increase in rate as high as other ARMs, at least that’s what they say.

Third, because there are limits on how high the loan can reset, even after 10 years, you are much less likely to refinance.

The trouble with ARMs today is, you might get a good rate, but, three or five years from now, rates may have gone up. If so, you’ll probably want to refinance into a fixed rate loan, and the closing costs, etc., of doing that will eat up a lot of the money you’ve saved from having an ARM. With these new ARM loans, you’ll most likely stay in them, longer, or forever, allowing you to keep the savings.

Ask your mortgage loan professional.


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