An Adjustable Rate Mortgage (ARM) typically starts with a lower initial interest rate than traditional fixed rate mortgages. After a set payment period—anywhere from one to 10 years—the interest rate may change periodically based on market conditions. As the rate changes, so does your monthly payment. However, ARM loans feature an adjustment “cap” that limits how much the interest rate can go up, protecting you from excessive increases in your monthly payment.
Hybrid ARMs: These loans are a mix of both a fixed-rate and an adjustable-rate period. In a 5/1 ARM, for example, the interest rate is fixed for the first 5 years of the loan. After that, the rate adjusts on an annual basis until the loan is paid off. Typically, Hybrid ARMs are 3/1 ARM, 5/1 ARM, 7/1 ARM, and 10/1 ARM. The initial rate on any ARM will be lower than a fixed-rate mortgage, making payments more affordable. However, after the initial set payment period has passed, interest rates can adjust higher or lower based on market conditions. As a result, monthly mortgage payments would increase or decrease based on market conditions.
FHA ARMs: Unlike other typical ARM loans, the FHA ARM starts at a slightly higher rate. The benefit is that the first adjustment is not as large. The yearly interest on an FHA ARM loan can increase or decrease no more than 1% per year vs. the typical 2% for other ARM loans. The lifetime cap of the FHA adjustable rate mortgage is no more than 5% over the initial start rate vs. 6% for other ARM loans.
An ARM may be preferable if….
- You plan to stay in your home for five years or less
- You have enough flexibility in your budget to pay a fluctuating amount each month for your home loan
- Current interest is widely believed be at or near the top
- You believe inflation will decline above average during the life of your mortgage
- You can’t afford to pay a little higher interest rate for getting a fixed interest rate for the entire term of your mortgage
- You are planning to sell or refinance your home in the foreseeable future
Depending on your personal situation, an ARM may or may not be right for you. Contact me to help you find the best mortgage solution for your situation at the most competitive rates. As an independent mortgage broker, I represent you, and not any specific bank or mortgage lender, so I have greater freedom to find you the best mortgage for your needs at the most competitive rates.