Adjustable Rate Mortgages

An adjustable rate mortgage (ARM) can help you save money on a loan, especially if you only intend to live in the home for a few years.

Many adjustable rate mortgage types are available, with the most common being 3/1, 5/1, 7/1, and 10/1 ARMs. For each, the first number is the initial term during which the interest rate is fixed (so 3, 5, 7, or 10 years). The second number is how often your interest rate can change every subsequent year for the remainder of the loan’s term. As an example, a 5/1 30-year ARM would have a fixed rate for the first 5 years, and the rate can change once every year for the following 25 years.

Caps can be set to help protect you against rate increases. Periodic caps limit how much your rate can increase at specific dates. A lifetime cap limits how much it can increase over the entire life of your loan. A payment cap limits how much your monthly payments can increase as the result of a rate adjustment.

Adjustable Rate Advantages:

• Your initial interest rate can be lower than what you’d get from a fixed rate mortgage
• Your rate may decrease based on market conditions, and so might your monthly payment
• You can protect yourself from rate increases with caps based on your specific situation

Adjustable Rate Disadvantages:

• Your rate my increase depending on market conditions, and so may your monthly payment
• Payment caps may result in monthly payments which do not cover the interest on your loan (negative amortization)

Eligibility

In order to qualify for an adjustable rate mortgage, you must have sufficient income and a strong enough credit history to demonstrate that you will be able to repay your loan.