The adjustable rate mortgage, also known as an ARM, varies significantly from the
fixed rate mortgages. With an adjustable rate mortgage, the interest rates increase
and decrease depending on the conditions of the market. Adjustable rate mortgages
stay fixed much like a fixed rate mortgage for a set period of time. Subsequent to
the expiration of the particular fixed period of time, the interest rate on the mortgage
will adjust yearly or every six months, on the anniversary of the mortgage. ARMs are frequently offered
at a lower interest rate than their fixed counterparts. As a result, these ARMs may
be a wise choice for borrowers who believe they will be selling their homes or
refinancing their homes in the near future. As a result of bearing a lower interest
rate, ARMs make it easier for borrowers to qualify for a loan due to the fact that
less income may be required to qualify for a lower monthly payment. Moreover, these lower
interest rates allow borrowers to borrow more money and thereby purchase a more expensive
home. Borrowers who obtain ARMs are not locked into high interest rates that may be in
place when they locked in their loans because ARM rates adjust downward if rates decrease.
3/1 ARM 5/1 ARM 7/1 ARM 10/1 ARM
The 3/1, 5/1, 7/1, and 10/1 adjustable rate mortgage loans are loans with an initial rate which is fixed for a given amount of time and thereafter adjusts annually or semi-annually. The amount of time during which the rate is fixed is noted by the loan name. For example, the 3/1 ARM loan has a fixed rate for the first three years of the loan and the 5/1 ARM loan has a fixed rate for the first five years. After the designated initial period or the reset date, annual rate adjustments occur according to the one-year Treasury index outlined in the loan program.
As with other adjustable rate mortgage loans, these hybrid loans provide many advantages for the borrower.
First, adjustable rate mortgage loans produce interest savings in the short run for the borrower when
compared to fixed rate loans. Also, the terms and features of a hybrid ARM can be altered to suit any
borrower’s needs. Similarly, borrowers benefit from the ability to qualify for larger loan amounts with
lower initial interest rates than they could with a comparable fixed rate loan, thus giving the borrower
more leverage in the size of the home they can purchase.
6 Month ARM 1 Month ARM 1 Year ARM
Borrowers utilizing the 1 Month, 6 Month ARM, or 1 Year ARM will be maintaining a loan that has interest adjustments
every single month, every six months, or every year. The interest rate of the loan will adjust according to the
Treasury index. Consequently, monthly payments will change over time in accordance to the changing interest rate.
Option ARM
The option ARM allows the borrower additional flexibility in providing several possible payment options to the borrower each month. In addition to payment flexibility, the option ARM allows a borrower to qualify for a more expensive home with its low introductory start rates and low qualifying rates. As with other ARMs, the option AMR is best suited for those borrowers interested in owning the home for a shorter period of time. Possible monthly payment options for the borrower include:
- The minimum payment option
- The interest only payment option
- The fully amortized 30 year payment option
- The fully amortized 15 year payment option
Advantages of ARMs
- ARMs typically have lower initial interest rates than fixed rate mortgages.
- The lower initial interest rates allow borrowers the opportunity to purchase a higher priced home for the rate.
- ARMs provide borrowers with the opportunity to adjust with the changes in the market while not being locked into an interest rate.
- The initial fixed term option on an adjustable rate mortgage provides borrowers with an alternative to the longer term fixed rate mortgages, which is important for borrowers who know that they will not be living in the home beyond the initial fixed period.
- The adjustable rate mortgages adjust at specific times during the life of the loan. Accordingly, borrowers know when to expect change and know how much change will result.
- Borrowers benefit from lower initial monthly payments.
- Borrowers can qualify for higher loan amounts.
- Borrowers also benefit from lower payments over shorter periods of time.
- Rates and payments may decrease if rates improve.
Disadvantages of ARMs
- Borrowers may experience payment changes over time.
- Borrowers may have to contend with higher payments if rates increase.
- There is more risk associated with an adjustable rate mortgage than with fixed rate mortgages.
