Adjustable Rate Mortgages (ARM)

An ARM is a mortgage with an interest rate that may increase or decrease periodically.

Why you should consider an ARM:

  • Lower rate equals lower payments
  • It will allow to take advantage of falling rates without refinancing
  • It could be cheaper for homeowners who don't plan on living in one place for a very long time 
  • Most consumers refinance every 3-5 years, so it is better if you plan to move, remodel, retire, etc..
  • Real Estate Loan Checklist

An adjustable rate mortgage (ARM) has a fluctuating interest rate after the fixed rate period has expired. For example, a 7/1 ARM means that for the first seven years of your loan, the introductory rate will be fixed (that is the 7 in 7/1). After that, the interest rate can change every year (that is the 1 with rate change in 7/1).

The reason for the fluctuation is that the interest rate moves up or down along with the index it is tied to. The loan will identify which index the ARM follows as well as the rate cap. The rate cap is the amount by which rates and payments can change – this will protect you from steep year-to-year increases.

There are many ARM products to consider:

1-Year ARM features:

  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 6% total rate change over the life of the loan

3/1 Fixed/Adjustable features:

  • Fixed rate for first 3 years, variable for remaining 27 years; review period – 12 months
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 6% total rate change over the life of the loan

5/1 Fixed/Adjustable features: 

  • Fixed rate for first 5 years, variable for remaining 25 years; review period – 12 months
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 5% total rate change over the life of the loan

5/5 Fixed/Adjustable features:  

  • Fixed rate for first 5 years, then adjusts and is fixed for another 5 years. Adjustments occur every 5 years.
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change every 5 years
  • Maximum of 5% total rate change over the life of the loan

7/1 Fixed/Adjustable features: 

  • Fixed rate for first 7 years, variable for remaining 23 years
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 5% total rate change over the life of the loan

A fixed rate loan, is one that never adjusts. Now that you know about the differences between an ARM and a fixed rate mortgage, you’re better able to figure out which option works best for your situation.

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