Adjustable Rate Mortgages
Adjustable Rate Mortgages (also known as ARMs) have a variable interest rate.
The monthly payments are recalculated on a regular basis to reflect changes
in the market interest rate. Interest rates are typically lower than in fixed-rate
mortgages, but expose you to the risk that market interest rates may rise in
the future. ARMs allow you to fix the interest rate for the length of time that
you plan to hold the loan without paying extra for interest rate protection
you don't need.
Advantages
- Lower interest rate. Since the lender is assuming less risk on the possibility
of interest rates going up, they offer lower interest rates.
- Lower monthly payment.
- Initial rate on ARM is fixed. The shorter the initial fixed period, the
lower the initial rate.
- Ability to increase the borrowed amount if you are just outside the range
of your dream condominium.
Disadvantages
- Interest rates may go up. If you keep your loan longer than expected you
may have to make a higher payment, your interest rates may rise if the market
rates go up.
Common ARMs (on 30 year loans)
In the following scenarios, the first number is the fixed rate out of 30 years,
the second number is how often the interest is adjusted annually.
10/1 ARM
The initial rate is locked for 10 years, annually adjusted the remaining 20
years.
7/1 ARM
The initial rate is locked for 7 years, annually adjusted the remaining 23 years.
5/1 ARM
The initial rate is locked for 5 years, annually adjusted for the remaining
25 years.
3/1 ARM
The initial rate is locked for 3 years, annually adjusted for the remaining
27 years.
1 Year ARM
Interest rate and adjust annually.
6 Month ARM
Interest rate and adjust semi-annually.
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