Adjustable Rate Mortgages
An adjustable-rate mortgage, or ARM as it is currently referred to, is a type of mortgage with an interest rate that changes (“adjusts”) periodically in relation to pre-determined intervals. Normally, the initial interest rate is fixed for a specified period of time, after which time it adjusts up or down according to current market conditions.
Typically, ARMs are expressed as two numbers, for example 5/1. In our example, the loan’s rate will not change during the first five years. After those 5 years are up, it will adjust annually as evidenced by the 1. If you plan on staying in your home for only a short while, an ARM could prove to be quite beneficial.
Why Choose an Adjustable-Rate Mortgage?
Many financially savvy people choose an adjustable-rate mortgage for the low interest rates and initial fixed-rate period. This affords homeowners the opportunity to pay more towards the loan’s principal without penalty allowing them to pay off their loan in less time. With an adjustable-rate mortgage, homeowners can enjoy benefits such as:
Low Interest Rates: The interest rates for adjustable-rate mortgages are currently the lowest they’ve ever been. In fact, the rate for an ARM is often much lower than more traditional loans, such as the 30-year fixed-rate mortgage.
Short Term Plans: Many times home buyers choose an adjustable-rate mortgage with a fixed term of three, five, seven, or even ten years because they know they are only going to stay in that particular area or home for a short amount of time.
Qualify for More House: An ARM may allow you to qualify for a higher loan amount and therefore a costlier home. Many home buyers choose to start with an adjustable-rate mortgage and then refinance to a fixed-rate mortgage.
ARMs Don’t Always Adjust Up: Most people assume that after the initial fixed term expires, their rate will rise, but this is not always the case. Adjustable-rate mortgages can adjust down as well as up dependent on current market conditions.
What Kind of ARMs Are Available?
Here are just some of the terms you may find when choosing an adjustable-rate mortgage for your purchasing or refinancing needs.
3/1 ARM: Fixed interest rate for the first three years, adjusts annually for the remaining life of the loan (27 years on a 30-year loan).
5/1 ARM: Fixed interest rate for the first five years, adjusts annually for the remaining term of the loan (25 years on a 30-year loan).
7/1 ARM: Fixed interest rate for the first seven years, adjusts annually for the remaining term of the loan (23 years on a 30-year loan).
10/1 ARM: Fixed interest rate for the first ten years, adjusts annually for remaining term of the loan (20 years on a 30-year loan).