Adjustable Rate Mortgages
Unlike a
Fixed-Rate loan, Adjustable Rate Mortgages (ARM)
have a fluctuating interest rate that varies with the current market. How this
typically works is, after an initial amount of time, usually 3 to 5 years, the
interest rate is periodically recalculated to the current market interest
rate.
Most ARM loans have a yearly cap rate as well as a
lifetime cap rate. This limits the amount the loan can increase annually as
well as guarantees that it will not go over a preset rate over the life of the
loan.
There are different types of ARM’s available as well. Two
of the most popular are the 3/1 ARM and the 5/1 ARM where you start off with
an initial fixed interest rate for the first three or five years,
respectively, and then every other year after that the interest rate is set to
the current industry interest rate determined by a pre-defined index.
For example, if you borrow $150,000 for 30 years with an
initial interest rate of 7%, after 3 to 5 years (depending on your program),
the interest rate may increase or decrease for a year until it is again
recalculated.
Be sure to read our other mortgage advice articles:
Fixed Rate Loans
VA Loans
FHA Loans
Balloon Loans
Convertible Mortgage Loans
Negative Amortization Loans
Graduated Payment Mortgages
Buy-Down Mortgage
Jumbo Loans
2nd Mortgage Loans
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