Adjustable rate mortgages can be a tremendous program for borrowers who want their payment fixed for a shorter period of time. Since the payments are fixed for a shorter period the rates are often much more attractive than the 30 year fixed program. An ARM product can give a borrower more buying power since the rates are lower. They are also great for clients who know they will only be in their home for a certain period of time.
This type of loan has monthly payments that are based on a 30-year repayment schedule and the interest rate remains fixed for either 3, 5, 7 or 10 years. After that time the interest rate (monthly payments) may change every year. This is called the adjustment period. The new rate is based upon changes in a financial index and is calculated by adding the fixed margin to the index. Let's say the index equals 4.5% at the time of adjustment and the margin equals 2.50%, the new interest rate would be 7%. However, adjustable loans usually have an adjustment cap. So, if the adjustment cap is 2%, the new rate would be 6.5%. There is also a lifetime cap which limits how much the rate can go up or down during the life of the loan. These loans can work out well for people who stay in their house for the short term.
10/1 ARM -The 10 year ARM rates often run very close to the 30 year fixed. Be sure to compare the 10 year ARM against the 30 year fixed to be sure the savings difference is worth it. You'll find a more significant interest rate difference in the 7 and 5 year ARM programs. The payments are fixed on this program for the first 120 months
7/1 ARM-The 7 year ARM offers a great balance between the payments being fixed for a good stretch of time and giving the benefit of securing a lower rate compared to fixed loan products. There have been analysis done showing the average homeowner keeps their mortgage for 7 years before refinancing or selling. This is probably why the 7 year ARM is the most popular program in this category.The interest rate and payment is fixed for the first 84 months of the loan's 30 year term. At the end of the 84 months, the interest rate adjusts.
5/1 ARM-The 5 year ARM has the lowest rate available and for this reason is also very popular amongst clients. If you are interested in having the lowest payment possible this program is for you. Clients who choose this program are often looking to maximize their cash flow or increase their purchasing power. The interest rate and payment is fixed for the first 60 months of the loan's 30 year term.
An Adjustable Rate Mortgage may not be for everyone. Talk to one of our Licensed Mortgage Loan Experts about your financial goals. They will find the right program to fit your needs.