PERIODIC ADJUSTMENTS
Adjustable-Rate Mortgage
An ARM is a mortgage loan with an interest rate that is adjusted periodically based on certain parameters.
QUICK REFERENCE
Understanding ARMs
The 5-year and 7-year adjustable-rate mortgages are the most common although other terms are often available (from 3 to 10 years).
Basic elements of ARMS:
- Initial rate: The preliminary interest rate.
- The adjustment period: The period in which the current rate will remain consistent.
- The index rate: The future rate changes are based on a variety of indices such as the SOFR.
- The margin: The percentage which gets added to the index rate to determine the adjusted interest rate.
- Interest rate cap: The percentage of change that can be added to or deducted from your current rate.
- Ceiling: The highest interest rate permitted during the life of the loan.
ARM examples:
- 10/6 ARM: Your interest rate is set for 10 years then adjusts for 20 years.
- 7/6 ARM: Your interest rate is set for 7 years then adjusts for 23 years.
- 5/6 ARM: Your interest rate is set for 5 years then adjusts for 25 years.
- 3/6 ARM: Your interest rate is set for 3 years then adjusts for 27 years.
ADJUSTABLE-RATE MORTGAGE
Advantages
- Interest rates and payments are typically lower than fixed-rate mortgages (FRMs)
- Rate may decrease after the initial period
- Typically allows borrowers to qualify for a larger loan
- Great for homeowners who do not plan to live in the property longer than the initial term
- Great for investors who plan to flip the property within a relatively short period
- Free up money each month for living expenses or investments
- In a market where interest rates are increasing it could cost less over the life of the loan
ADJUSTABLE-RATE MORTGAGE
Disadvantages
- Rate may increase after the initial period
- Can be difficult to understand
- In a market where interest rates are increasing it could cost more over the life of the loan
