Adjustable Rate Mortgage Loans

Adjustable Rate Mortgage Loans – ARM’s

These popular loans—also called 3/1, 5/1, 7/1 or 10/1 ARM’s—can offer the best of both worlds: lower interest rates and a fixed payment for a specific period of time. For example, a “5/1 ARM 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. To keep this risk in check, charges on rate adjustments are limited with “caps.” Caps are a common feature of ARM’s, and they limit the total rate change over the life of a loan.

It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs. We offer a wide variety of ARM’s to fit your unique needs. When it comes to ARM’s there’s a basic rule to remember…the longer you ask the lender to charge you a specific rate, the more expensive the loan.

Why consider an ARM?

  • Lower rates.  ARM’s generally have the lowest possible mortgage rate. In fact, ARM rates, such as that of a 7/1 ARM, can be approximately 1% lower than that of a 30-year fixed-rate mortgage. The 7/1 ARM rate would be fixed for seven years, potentially saving you thousands in interest expense that you could use, for example, to pay off credit card debt, or add to your retirement savings.
  • You plan to sell your home soon. If you plan to sell your home before the loan adjusts, you may save money versus a fixed-rate loan. For example, if a job transfer is likely, an ARM would be a better solution than a higher rate, 30-year fixed-rate mortgage. The lower initial rate of an ARM can be a good strategy for mobile professionals, homeowners who plan to upsize or downsize, and anyone who will live in their home for the short term.
  • You want “more house.” By applying for an ARM, you may qualify for a higher loan amount and can buy a more valuable house.

Advantages of an ARM Loan are:

  • Lower initial monthly payment
  • Lower monthly payment over a shorter time period
  • Payment may go down if rates improve
  • May qualify for higher loan amounts
  • Historically less expensive than fixed rate loans

Disadvantages of an ARM Loan are:

  • More risk
  • Payment may change
  • Higher payments if rates go up dramatically
  • If you prepay your mortgage, you can’t get that money back out without refinancing

Additional Considerations

  • The rate change (or the “adjustment”) is determined by a mathematical formula based on a particular index – most commonly the 1-Year U.S. Treasury Bill. Your lender won’t control the index, so it’s safe to assume that your adjustment will be unbiased (although you should always verify your new rate by comparing published numbers in financial papers).
  • All ARM’s carry lifetime rate caps, which limit the amount that your rate can increase over the life of your loan. Most ARM’s also have periodic rate caps, which limit the amount of rate increases for each adjustment.

Please call Derek for a rate quote on an ARM or with any ARM questions!