What is an Adjustable-Rate Mortgage?
With an Adjustable-Rate Mortgage (ARM), the interest rate stays constant for a specified loan period and then fluctuates based on market conditions. An ARM typically has a lower interest rate than a 30-year Fixed-Rate Mortgage for the initial fixed-rate period. However, at the end of the initial fixed-rate period, the interest rate becomes variable and may move up or down depending on the direction of the mortgage index it is associated with. All ARM programs come with a pre-set margin and are tied to a major mortgage index, such as the LIBOR. ARMs carry risk as the interest rate and monthly mortgage payments can change sharply.
Academy Mortgage offers the following hybrid Adjustable-Rate Mortgages: 10/1 ARM, 7/1 ARM, 5/1 ARM, and 3/1 ARM. The first number (10, 7, 5, or 3) indicates the number of years in the initial fixed-rate period. The second number (1) indicates the adjustment interval, which is the period between potential rate changes. In other words, with these loans, the interest rate is fixed for the specified loan period (10, 7, 5, or 3 years) and then adjusts on an annual basis (every 1 year) for the remainder of the loan. The entire loan term for an ARM is typically 30 years.
What are the benefits of an ARM?
An ARM offers the following features:
- Lower initial interest rate than a Fixed-Rate Mortgage for the same period.
- Lower initial monthly mortgage payment than a Fixed-Rate Mortgage for the same period.
- Payment caps, which limit the amount of rate change that can occur in certain time periods.
- Lender’s margin is reflected in annual rate increase.
- Loans with shorter initial fixed-rate periods usually have a lower interest rate.
- Flexibility to refinance at the end of the loan term.
- Money saved can be used as a down payment on a next home.
- May be an alternative for buyers who do not qualify for a Fixed-Rate Mortgage.
Who may benefit from an ARM?
ARMs are most appropriate for buyers who do not plan to own their home for longer than the initial fixed-rate period, or plan to refinance when the fixed period ends.
For more information
Contact your Loan Officer today to see if an ARM is the right solution for you. We take pride in delivering value and savings to homebuyers across the United States. It would be a pleasure to help.