Adjustable Rate Mortgages - What they are and how they work

Adjustable Rate Mortgages (ARMs) as you may have guessed fluctuate the interest rate on your 30-year home loan. Most ARMs appeal to people who are planning on staying in a home for only a few years. For the first 1-3 years the interest rates are lower than the going rate. However, ARMs can be a bit risky and you may end up paying more interest than you would have with just your normal mortgage. Because the loan is variable the interest rate can go up and super exceed the going rate over time.

There is a maximum that the interest on the loan can increase in each variance. This is known as the rate cap. For example, if you have an ARM that changes interest rates every 12 months the cap might state that the interest rate cannot rise more than 2% each year. All ARMs have a lifetime rate cap that will not let the interest rate go above a certain point. This is for protection to the borrower.

The mortgage rate an ARM gets is determined by its index. Different indexes change at different rates. There is no good or bad index. They all have advantages and drawbacks and are used in different situations. You will want to find one that is more fit to your needs. ARM indexes generally relate interest rates to how the economy in doing. As the interest rates fluctuate up and down so do your payments. ARMs don’t always adjust according to indexes, however, they can adjust to conditions also.

In the end if you play your cards right ARMs can save big bucks for the first three years. So, if you’re planning on living in a home for less than 10 years an ARM may be the direction you want to go. Click here to apply for an ARM loan now.

Here are some different types of ARMs:

1-Year ARM – An Adjustable Rate Mortgage in which the interest on your loan changes every 12 months from the anniversary mark of your 30 year loan. It is considered quite risky because your monthly payment will change each year and over time the interest rate will likely climb. This would suit somebody that is going to live in a house for a short period of time (3-5 years) while the rates are low, and who could afford a rate increase if the the rates did go up.

3-Year ARM – An Adjustable Rate Mortgage in which the interest on your loan changes every 3 years during the 30-year period of the loan. It’s not as risky as the 1-year ARM because the interest rate doesn’t fluctuate as much.

5-Year ARM – This Adjustable Rate Mortgage has an interest rate that changes every five years during the 30-year period of the loan. It is a safe median between a fixed rate mortgage and a 1-year ARM.

3/1 Adjustable Rate Mortgage – This is quite a different type of ARM. There is a fixed interest rate for the first three years of the 30-year loan. After that the it acts as a 1-year ARM with an interest rate that changes every year

5/1 Adjustable Rate Mortgage – Similar to the 3/1 ARM, the 5/1 has a fixed interest rate for five years then acts as a 1-year ARM for the remainder of the 30 years.

7/1 Adjustable Rate Mortgage – This ARM has a fixed interest rate for seven years. It will then act as a 1-year ARM and the interest rate will fluctuate every years.

10/1 Adjustable Rate Mortgage – Finally, this ARM allows for a fixed interest rate for 10 years. It will then act as a 1-year mortgage and the interest rate will change every year.

Our Lenders service all of these types of ARM loans. If you would like to received a free quote for an ARM loan, click here and complete our mortgage prequalification form.