Adjustable Rate Mortgages
These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
Adjustable Rate Mortgage FAQs
The rates on adjustable mortgage are short-term. Short term rates are usually lower than fixed-rate mortgages resulting in lower monthly payments for the fixed period of the ARM. AS a result, ARMs allow a home buyers to purchase a more expensive home. ARM are also a great loan option for short-term real estate investments.
Market conditions can affect a number of different financial factors, which, cause the interest rates on an adjustable rate mortgage to rise and fall. Different adjustable rate mortgages use different indexes to establish the rate of the adjustable rate mortgages like the 11th District Cost of Funds Index (COFI), the London Interbank Offered Rate (LIBOR), the 12-month Treasury Average Index (MTA), the Constant Maturity Treasury (CMT) and the National Average Contract Mortgage Rate.
Adjustable-rate mortgages (ARMs), have monthly payments that start lower that a fixed-rate mortgage but can move up and down as interest rates fluctuate. ARMs traditionally have an fixed-rate period of either 3, 5, or 7 years in which the rate doesn’t change. This is followed by a longer period where the rate may change at preset intervals.
The rate for an ARM adjusts after a given time after the fixed rate period ends. It’s commonly known as know as the “adjustment period.” The most common adjustment period for an ARM loan is 1 year. This means that once a year, the loan rate adjusts to the index + margin.
ARM & Interest Only ARM vs. Fixed Rate Mortgage
Use this calculator to compare a fixed rate mortgage to two types of ARMs—a Fully Amortizing ARM and an Interest-Only ARM. A fixed rate mortgage has the same payment for the entire term of the loan, while an adjustable rate mortgage (ARM) has a rate that can change after the first five years, which could increase or decrease your monthly mortgage payment.
Is an Adjustable Rate Mortgage Right for You?
Lower Monthly Payments
Payments made during the initial fixed rate period will be lower than a long-term fixed-rate mortgage.
Save Your Cash
You can use the monthly saving during the initial fixed rate period and add it to your retirement or other savings plans.
Rates Can Drop
If interest rates drop you can take advantage of lower interest rates at the end of your adjustment period.
An adjustable rate mortgage is a great option if you plan to fix the house up and sell it within a few years.
Capped Payment Increases
ARM loans have a cap on how fast the rate can increase, which means that even if payments go up, there’s a limit.