Adjustable-Rate
Loans
HOW IT WORKS
An adjustable-rate mortgage (ARM) has an interest rate that may change over time. Typically, an ARM starts with a fixed rate for a set period, followed by a phase when your interest rate can shift up or down according to market conditions. While shopping for mortgages, you will typically see an ARM expressed similar to a fraction, such as 5/6m, 7/6m, or 10/6m ARM. Here’s what those numbers mean:
First number: The ARM’s introductory fixed-rate period in years or months
Second number: How often your ARM’s interest rate may change in years after the fixed period ends
For example, if you have a 5/6m ARM, your interest rate will stay the same for five years. After that period ends, the rate may fluctuate every 6 months for the rest of your loan.
When it comes to ARMs there's a basic rule to remember... the longer you have the lender charge a fixed rate, the more expensive the loan may be over time.
ADJUSTABLE- RATE MORTGAGE TERMS
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
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.
Monthly ARM
With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so their vulnerability is significantly reduced.
2/1 Buy Down Mortgage
The 2/1 Buy-Down Mortgage allows the borrower to qualify at below-market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.
Annual ARM
This loan has a rate that is recalculated once a year.
