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Adjustable-Rate Mortgages
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An adjustable-rate mortgage (ARM) means that the interest rate changes over the life of the loan — according to the terms specified in advance. With ARMs:
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The initial interest rate is usually lower than with a fixed-rate mortgage.
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The monthly repayment would also be lower.
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The interest rate may be adjusted (up or down) at predetermined times.
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The monthly payment will then increase or decrease.
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Most ARM programs do offer "rate cap" protection, which limits the amount the rate can be increased, both each year and over the life of the loan.
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All ARMs are amortized over 30 years.
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Advantages: ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If interest rates go down, you’ll enjoy lower payments. Usually an ARM is the best choice for homeowners who plan to relocate (for example, with their company or the military), or for those who are purchasing their first home and plan to be in the property only for three to five years. Remember that, on average, most people move or refinance within seven years.
Disadvantages: Your monthly payments can increase if interest rates go up. Keep in mind that ARMs are best for homeowners who aren't planning on staying with a property for a long period. If you’re on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.
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Types of Adjustable-Rate Mortgages |
Our Advantage ARM is a 6-month Interest Only adjustable rate mortgage (ARM), providing the absolute lowest start rate and the lowest initial mortgage payment. It is a 25-year term product that allows interest only payments for the first 10 years of the loan and will be fully amortizing (principal and interest) the last 15 years of the loan. This loan will adjust with the market every 6 months throughout the life of the loan. An Advantage ARM can increase your buying power and lower your monthly payments. Typically an ARM is the best choice for homeowners who are not concerned with the rate and payment adjustments that could occur with an ARM, plan to relocate (for example, with their company or the military), or for those who are purchasing their first home and plan to be in the property for a short time.
With a 3/1 Adjustable-Rate Mortgage, you'll have three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. A good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.
A 5/1 Adjustable-Rate Mortgage means the initial rate remains fixed for the first five years of repayment, and then adjusts every year thereafter. Remember that your rate and monthly payments may go up after only five years, so this choice is best if you're expecting to sell or refinance the property within that period.
A 7/1 Adjustable-Rate Mortgage offers an initial rate that is fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.
With a 10/1 Adjustable-Rate Mortgage, the initial rate of the loan is fixed for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years, so you'll enjoy the stability of a 30 year mortgage at a lower price than a fixed-rate mortgage of the same term. But an ARM is likely not the best choice if you're planning on owning the same property for more than 10 years.
With a 3/1 Interest Only Adjustable Rate Mortgage, the interest rate remains fixed for three years. After the first three years, your interest rate will adjust every year for the remaining life of the loan. During the first ten years, you will make monthly payments of interest only on the principal balance. You will not reduce your principal balance during the first ten years of the loan. Starting in the 11th year of the loan, you will make monthly payments of principal and interest in an amount sufficient to completely repay the unpaid principal balance, at the current interest rate, over the remaining term of the loan.
With a 5/1 Interest Only Adjustable Rate Mortgage, the interest rate remains fixed for five years. After the first five years, your interest rate will adjust every year for the remaining life of the loan. During the first ten years, you will make monthly payments of interest only on the principal balance. You will not reduce your principal balance during the first ten years of the loan. Starting in the 11th year of the loan, you will make monthly payments of principal and interest in an amount sufficient to completely repay the unpaid principal balance, at the current interest rate, over the remaining term of the loan.
With a 7/1 Interest Only Adjustable Rate Mortgage, the interest rate remains fixed for seven years. After the first seven years, your interest rate will adjust every year for the remaining life of the loan. During the first ten years, you will make monthly payments of interest only on the principal balance. You will not reduce your principal balance during the first ten years of the loan. Starting in the 11th year of the loan, you will make monthly payments of principal and interest in an amount sufficient to completely repay the unpaid principal balance, at the current interest rate, over the remaining term of the loan.
With a 10/1 Interest Only Adjustable-Rate Mortgage, the initial rate of the loan is fixed for the first ten years with an interest only payment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. But an ARM is likely not the best choice if you're planning on owning the same property for more than 10 years.
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