Adjustable Rate Mortgages
ARM’s allow you to fix the interest rate for the length of time that you plan to hold the loan without paying extra for interest rate protection you don’t need.
- They typically have a lower interest rate. Since the lender is assuming less risk on the possibility of interest rates going up, they offer lower interest rates, which translates to a lower monthly payment on a similar term fixed rate mortgage.
- The initial rate on an ARM is fixed. The shorter the initial fixed period, the lower the initial rate can be.
- You can borrow more with an ARM than a Fixed Rate Mortgage. If you’re just outside the range of your dream home, an ARM can make all the difference.
- Your interest rates may go up. If the market takes a turn for the worse, or you keep your mortgage longer than you intended (that is, you decide to stay in the house longer than the initial fixed interest rate, instead of selling the house to another buyer), you may be stuck with larger payments. In other words, if you initially plan to stay in the house you’re buying for five years, and get a loan with a five year fixed initial interest rate, and you end up staying longer, your interest rates may rise if the market rates go up.
The 10 in 10/1 indicates the length of the fixed initial rate out of 30 years, and the 1 indicates that the interest rate is readjusted annually for the remaining length of the term (in this case, 20 years).
The initial interest rate is locked for 7 years, and then annually adjusted for the remaining 23 years.
The initial interest rate is locked for 5 years, and then annually adjusted for the remaining 25 years.
The initial interest rate is locked for 3 years, and then annually adjusted for the remaining 27 years.
1 Year ARM
A 30-year loan with an interest rate and monthly payments that adjust annually.
6 Month ARM
A 30-year loan with an interest rate and monthly payments that adjust every six months.
The shorter the initial rate is, the lower your initial monthly payment will be, but the higher your highest possible monthly payment will be as well.
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