What is the difference between a fixed rate loan and a ARM? Why is the index on the ARM so difficult to understand?

A fixed rate mortgage rate is set at the time the mortgage is written and never changes. For example a 30 year mortgage at 4.5%. An ARM or (Adjustable Rate Mortgage) their is an initial interest rate set at the start of the loan say 6.0% for the first two or three years and then the rate can adjust after that based on an index set in loan.

CMT, COFI, and LIBOR are the most common indexes that an ARM is set against. An ARM loan can also limit how many percentage points a loan can go up or down by in a given year and at what intervals it can be adjusted. Needless to say ARM loans can get very complicated quickly and not be totally understood by the average home owner.

I have read this type of loan was really never meant for someone who is buying a home to live in but was originally created for people who wanted to invest in real estate and didn't plan to own the real estate as a long term investment.

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