Adjustable rate mortgages (ARMs) are
available with many different terms. The most popular ARM
products combine the benefits of a fixed rate loan with the lower
rate of an adjustable rate loan. The most popular of these loans
are the 3/1, 5/1, 7/1 and 10/1 year ARMs.
ARM Advantages: a penny saved is a penny earned
You may be uneasy with an ARMs lower payment if:
ARMs have lower initial interest rates than fixed rate loans because length of time that an ARM has a fixed interest rate is shorter. The shorter the fixed rate period, the lower the interest rate risk is to the lender.
You will find that an ARM with a fixed period of 3 years will have a lower initial rate than a loan with a fixed period of 5 years. Similarly, an ARM with a fixed period of 5 years will have a lower initial rate than a loan with a fixed period of 7 years and so on.
If you believe you will live in a house for three to ten years, why pay a higher interest rate for a 15 or 30 year fixed rate? If you sell or refinance the house within the ARMs fixed rate period you will save money with no changes in the interest rate or principal and interest payment.How ARMs work
The most popular ARMs feature fixed rate periods for the first 36 to 120 months of the loan depending on what type of loan you choose. You may choose an amortization period of up to 30 years (in some instances as long as 40 years). You may refinance or payoff any of these loans at any time with no prepayment penalties.
After the initial fixed rate period of 3 to 10 years, the interest rate on the loan is subject to change every year. The interest rate adjustments have annual limits for the percentage change as well as an aggregate limit over the life of the loan. These limits for interest rate changes are called caps. At the end of the fixed rate period, any rate changes are subject to both an annual rate cap and a life of loan rate cap. The interest rate caps for each different loan type depend on the fixed period of the loan.