What is an Adjustable Rate Mortgage (ARM)?

An adjustable rate mortgage does exactly what its name indicates: it adjusts its interest rate on a periodic schedule. Adjustable-rate mortgages are popular because they usually start with a lower interest rate, so your monthly payments are lower. This allows you to qualify for a larger mortgage than would be possible with a fixed-rate mortgage. The interest rate on an ARM is adjusted periodically based on an index that reflects changing market interest rates. Apply Today and SAVE!

There are many different types of Arms The most common are: 10/1 ARM, 7/1 ARM, 5/1 ARM , 3/1 ARM and 1/1 ARM. The first number is the length of the initial period - how long it is until the first interest rate adjustment. For example, the interest rate on a 10/1 ARM will not change for the first 10 years but can change in the 11th year. People often plan to sell or refinance their home before the end of the initial period.

 

 

What's the advantage to an ARM loan?

The benefits vary depending on the borrower's needs. If the borrower only intends to be in a home for a short period of time (1-5 years), then an ARM might be a good fit. If the borrower has credit problems, an ARM might work until the borrower's credit is improved and a conventional loan can be refinanced. An ARM is also good if fixed rates are high. Adjustable Rate Mortgages can offer lower payments.

 

 

What's the downside to an ARM loan?

The scary thing about ARM loans is that the borrower is at the mercy of the market. If rates go up, then your ARM payment will go up. You will not have anything fixed and it could get out of your budget.

 

 

Adjustable Rate Mortgage (ARM) Advice

As with any mortgage product, but especially an ARM, we recommend that you speak to a mortgage professional and weigh the pros and cons of an ARM versus a fixed rate mortgage loan.

 

Click one or more of the links at the top of this page and complete the form(s) to have mortgage professionals contact you to discuss the options available. REMEMBER, smart loan shoppers will complete forms at multiple websites and compare the advice and programs from multiple lenders before choosing a loan program.

 

 

What is a 10/1 Adjustable Rate Mortgage Loan?

The first number is the length of the initial period - how long it is until the first interest rate adjustment. For example, the interest rate on a 10/1 ARM will not change for the first 10 years but can change in the 11th year. People often plan to sell or refinance their home before the end of the initial period.

 

 

What is a 7/1 Adjustable Rate Mortgage Loan?

The first number is the length of the initial period - how long it is until the first interest rate adjustment. For example, the interest rate on a 7/1 ARM will not change for the first 7 years but can change in the 8th year. People often plan to sell or refinance their home before the end of the initial period.

 

 

What is a 5/1 Adjustable Rate Mortgage Loan?

The first number is the length of the initial period - how long it is until the first interest rate adjustment. For example, the interest rate on a 5/1 ARM will not change for the first 5 years but can change in the 6th year. People often plan to sell or refinance their home before the end of the initial period.

 

 

What is a 3/1 Adjustable Rate Mortgage Loan?

The first number is the length of the initial period - how long it is until the first interest rate adjustment. For example, the interest rate on a 3/1 ARM will not change for the first 3 years but can change in the 4th year. People often plan to sell or refinance their home before the end of the initial period.

 

 

What is a 1/1 Adjustable Rate Mortgage Loan?

The first number is the length of the initial period - how long it is until the first interest rate adjustment. For example, the interest rate on a 1/1 ARM will not change for the first year but can change in the 2nd year. People often plan to sell or refinance their home before the end of the initial period.

 

 

What is a 2/28 Adjustable Rate Mortgage?

This program is a 30 year adjustable program, except that the first adjustment does not occur until 2 years into the loan. At this point, adjustments are typically made every 6 months. Ask your lender about the frequency of adjustments, since some 2/28 loans adjust every year.

 

 

What is a 3/27 Adjustable Rate Mortgage?

his program is a 30 year adjustable program, except that the first adjustment does not occur until 3 years into the loan. At this point, adjustments are typically made every 6 months. Ask your lender about the frequency of adjustments, since some 3/27 loans adjust every year.

 

 

What is a 1 Year Adjustable Rate Mortgage?

 

This is a 30 year loan in which the rate (and therefore your monthly payment) changes every 12 months on the anniversary of your loan. The amount of the rate change (referred to as an Adjustment), is determined by a mathematical formula based on the U.S. bond market (most typically the yield on the 1 Year U.S. Treasury Bill). Your lender does not control this number, so it is safe to assume that your adjustment will be fairly determined (though you should always verify your new rate by comparing with published numbers).

This loan is considered quite risky since your payment may change significantly from year to year. In exchange for taking this risk, the borrower is rewarded with an initial rate that is significantly below market rates for 30 Year Fixed Rate Mortgages. Even after the loan adjusts, your new rates will typically be below those rates being offered to new borrowers for the 30 Year Fixed Rate program. In periods of rising interest rates, it is very possible that you will ultimately pay much more for a 1 Year Adjustable than a 30 Year Fixed Rate Mortgage.

 

 

 

What is a 3 year Adjustable Rate Mortgage?

This is a 30 year loan in which the rate (and therefore your monthly payment) changes every 3 years. Like the 1 Year Adjustable Rate Mortgage, your new rate is calculated based on a predetermined formula. This loan, while risky, is safer than the 1 Year Adjustable Rate Mortgage only because it does not adjust as frequently.

This loan is right for you if:

• You are willing to take on a moderate amount of interest rate risk in exchange for a lower initial rate which cannot change for three years

• You expect to move or refinance in about three years

 

 

What is a 5 Year Adjustable Rate Mortgage?

This is a 30 year loan in which the rate (and therefore your monthly payment) changes every 5 years. This loan is a nice compromise between shorter term Adjustable Rate Mortgages and Fixed Rate programs.

This loan is right for you if:

•  You expect to stay in your current home beyond the initial five years

• You still wish to keep your payments relatively low and you are willing to accept a small amount of interest rate risk in exchange for this benefit.

 

 

What is an Option Adjustable Rate Mortgage (ARM)?

The Option Arm has a start rate as low as 1.25%. It is an adjustable rate mortgage based on either of two indexes. It is a loan program that provides both stability and flexibility. The stability is from the fact that the indexes are based on a 12 month rolling average or weighted average. The flexibility gives you four payment options every month (minimum, interest only, principal and interest based on a 30yr schedule or principal and interest based on a 15yr schedule). The index is the part that adjusts every month. Your margin is added to the index every month to determine your rate. The margin will remain fixed over the life of the loan. The program also has caps. Your minimum payment has an annual cap of 7.5%. There is a deferment cap of 125% and there is a lifetime cap of 8.95%. There is also a recast every five years. Apply Today