ARM Mortgages
Types of Loans
Repayment Types
An adjustable-rate mortgage (ARM) is a type of mortgage loan in which the interest rate may change periodically, usually every year or every few years, after an initial fixed-rate period. The interest rate on an ARM is usually based on an index, such as the LIBOR (London Interbank Offered Rate), plus a margin. The margin is the amount that the lender adds to the index to determine the interest rate on your loan.
ARMs typically have a lower interest rate than fixed-rate mortgages during the initial fixed-rate period. However, the interest rate on an ARM can go up or down after the initial fixed-rate period, which means that your monthly payment may also go up or down.
There are a few different types of ARMs, each with its own set of features and benefits.
There are a few different types of ARMs, each with its own set of features and benefits.
- 5/1 ARM: This type of ARM has a fixed interest rate for the first five years, and then the interest rate adjusts annually after that.
- 7/1 ARM: This type of ARM has a fixed interest rate for the first seven years, and then the interest rate adjusts annually after that.
- 10/1 ARM: This type of ARM has a fixed interest rate for the first ten years, and then the interest rate adjusts annually after that.
ARMs can be a good option for borrowers who are looking for a lower interest rate in the short term, but who are willing to take on the risk of an interest rate increase in the future. ARMs can also be a good option for borrowers who plan to sell their home before the initial fixed-rate period ends.
However, it’s important to weigh the pros and cons of ARMs before you decide if they’re right for you.
Advantages of ARMs
- Lower interest rate: ARMs typically have a lower interest rate than fixed-rate mortgages during the initial fixed-rate period.
- Easier to qualify for: ARMs may be easier to qualify for than fixed-rate mortgages, especially if you have a lower credit score or a smaller down payment.
- Less upfront costs: ARMs typically have lower upfront costs than fixed-rate mortgages, such as origination fees and closing costs.
Disadvantages of ARMs
- Interest rate can go up: The interest rate on an ARM can go up after the initial fixed-rate period, which means that your monthly payment may also go up.
- You may not be able to refinance as easily: If interest rates go down after the initial fixed-rate period, you may not be able to refinance as easily as you could with a fixed-rate mortgage.
- You may have to pay more interest over the life of the loan: If interest rates go up after the initial fixed-rate period, you may pay more interest over the life of the loan than you would with a fixed-rate mortgage.
Overall, ARMs can be a good option for borrowers who are looking for a lower interest rate in the short term, but who are willing to take on the risk of an interest rate increase in the future. ARMs can also be a good option for borrowers who plan to sell their home before the initial fixed-rate period ends.
However, it’s important to weigh the pros and cons of ARMs before you decide if they’re right for you.
ARM Mortgage Features
- An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate can change periodically, usually every year or every few years, after an initial fixed-rate period. ARMs typically have a lower interest rate than fixed-rate mortgages during the initial fixed-rate period, but the interest rate can go up or down after that, which means that your monthly payment may also go up or down.
- The interest rate is fixed for an initial period, typically 5, 7, or 10 years.
- After the initial fixed-rate period, the interest rate can change periodically, usually every year or every few years.
- The amount that the interest rate can change is limited by a margin and caps.
- The monthly payment may go up or down after the initial fixed-rate period, depending on the change in the interest rate.
- ARMs may have lower upfront costs than fixed-rate mortgages.