What is an adjustable rate mortgage?
Adjustable Rate Mortgages (ARMs) are based on a 30-year term and are represented by two numbers (i.e. 5/1 ARM). The first number indicates the initial fixed-rate period and the second number indicates how many years after the fixed-term until the rate can be adjusted.
In general, the shorter the fixed-rate period, the lower your initial rate will be. Once the fixed period is up, your loan payment is recast using the remaining loan balance.
Benefits of an ARM
On average, most people only stay in their mortgage 5-7 years before selling or refinancing and an ARM allows buyer’s to pay. Today’s ARMs are limited on how often and by how much your rate can increase so you’ll never have to deal will a “balloon payment”.
- Interest rates are typically lower than comparable fixed-rate mortgages
- After the fixed-rate period ends, rates can go even lower
- More of your payment goes toward the principle
- Sell or refinance at any time
- No pre-payment penalties
- Lower rates