The interest rates charged by ARM loans tend to start at a lower level than similar fixed-rate loans. With conforming programs, ARM loan rates tend to start 1.500 to 2.000 percentage points lower than comparable fixed-rate loans. Non-conforming ARM rates tend to be 2.00 to 5.00 percentage points lower than comparable non-conforming fixed-rate programs.
Although ARM loans start with a lower rate and payment, the applicant must be qualified and underwritten using a rate that is higher than the start rate. Most lender will qualify the applicant’s income based on a monthly payment with an interest rate of two (2) percentage points greater than the start rate. For example, if the ARM loan’s start rate is 5.750%, the lender will normally qualify the applicant at a 7.750% interest rate.
Some conforming lenders and many non-conforming lenders will offer a slight advantage to the borrower by qualifying based on the fully indexed rate. The indexed rate is the program’s margin added to the current index rate. Essentially, the fully indexed rate offers no teaser discount.