Adjustable Rate Mortgage (ARM)
What is an Adjustable Rate Mortgage (ARM)?
This type of loan is different from a fixed rate mortgage. The interest rate for an ARM changes at set periods. For example, on a 5-year ARM, the interest rate will go up after 5 years.
This change in interest rate can be risky for some borrowers if they do not have a long term plan in place. However, ARM rates start out lower than most fixed rate loans, which gives you greater savings up front.
The interest rates are capped after a certain period. For instance, on a 10-year ARM, the interest rate will go up after 10 years. But after that adjustment, the interest rates are capped.
Typically, there are limits to how much the interest rate can go up. These built-in limits will cap how high the adjusted interest can be.
For this type of loan, the adjustments and rate caps should be explained in the contract. It’s important for ARM borrowers to understand the terms clearly, so they are not taken by surprise once the rate adjusts.
There are different options and terms when it comes to ARM loans:
5-year ARM: gives you an initial fixed period of 5 years before the rate adjusts. This option can be used for conventional, jumbo, FHA, and VA loans.
7-year ARM: gives you an initial fixed period of 7 years before the rate adjusts. This option pertains to conventional and jumbo loans.
10-year ARM: comes with an initial fixed period for 10 years before the rate adjusts. This can be used for conventional and jumbo loans.
There are several benefits to ARMs. This loan type can be a great option for people who:
- Move frequently
- Like to renovate and resell properties
- Expect to earn more income in upcoming years
- Plan to pay off the loan before the adjustment period
- Plan to refinance before the loan rate adjusts
While the ARM option may seem riskier than a fixed rate loan, the terms should be explained in the contract. As long as you understand the contract, there shouldn’t be any surprises. Also, there are many advantages to an ARM. Speak with a mortgage professional to see if an ARM is a good fit for you.
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