| 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
a few years an ARM may be the direction you want to go.
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.
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