What is an Adjustable Rate Mortgage?
An adjustable rate mortgage, or ARM, is a mortgage loan with a fixed interest rate for a set period of time after which the rate can vary on a predetermined schedule.
The future variable rate could be lower or higher than the initial fixed interest rate and is re-evaluated at set intervals, called adjustment periods. ARMs generally have caps that restrict how much the interest rate and/or payments can increase per year and over the lifetime of the loan. Most adjustable rate mortgages have a 30-year term. It is important to review the ARM disclosure for any ARM mortgage that you are considering to understand how much the rate may change each period and the maximum rate that may apply to the loan.
In general, the benefit of an ARM is that the initial fixed rate is lower than the then available current fixed mortgage rate. The main drawback to an ARM is that there is no certainty to know the future rate that may apply, except to the extent of the allowable caps.
Types of ARMs
When examining the types of ARMs, understanding the naming convention can be helpful. The first number indicates the number of years that the initial fixed interest rate will apply to the loan. The second number indicates how frequently the interest rate is evaluated and may be adjusted after the initial fixed period ends.
5-6 ARM
5-year fixed rate and then the interest rate adjusts every six months
7-6 ARM
7-year fixed rate and then the interest rate adjusts every six months
10-6 ARM
10-year fixed rate and then the interest rate adjusts every six months
15-1 ARM
15-year fixed rate and then the interest adjusts every year
Is an ARM a Good Fit for Me?
Are you on a fixed income?
Yes
Probably not a good fit.
For people with a fixed income and no expectation of future income increases, a fixed rate mortgage might be more in line with your needs.
No
May be a good fit.
If you anticipate an increase in your income, going with an adjustable rate mortgage could possibly save you from paying additional interest in the long term.
Do you plan on keeping the home or property past the fixed rate time period?
Yes
Probably not a good fit.
Contact a GoPrime loan officer to weigh your options.
No
May be a good fit.
If you do not plan to own the house or property for decades, or if you are going to move within a relatively short period of time, an ARM may make a lot of sense as you can obtain a lower initial interest rate.
Do you plan to pay off your loan before the adjustable rate kicks in?
Yes
May be a good fit.
Mortgage borrowers who have, or are going to have, the cash to pay off the loan before the new interest rate kicks in will definitely want to consider an adjustable rate mortgage.
No
Probably not a good fit.
Contact a GoPrime loan officer to weigh your options.
Would you be unable to afford your loan if the interest rate increases ?
Yes
Probably not a good fit.
If the amount of your mortgage payment will be beyond your means after the rate increases, you will want to consider a different type of mortgage. Contact a GoPrime loan officer to weigh your options.
No
May be a good fit.
If the amount of the mortgage after it resets to the maximum cap in the future is within your budget, an ARM will save you money monthly and interest over the life of the loan.