- John Banholzer
The Adjustable Rate Mortgage (ARM) Explained
With rising mortgage interest rates, we have heard a lot more buzz about Adjustable Rate Mortgage's over the last couple weeks. Historically speaking, rates are still considered fairly low, however, the benefits of an Adjustable Rate Mortgage might be of interest to some folks. But, what is an Adjustable Rate Mortgage? Let's go over a few details and how it may or may not benefit you.
An Adjustable Rate Mortgage (ARM), also know as a variable rate loan, usually offers a lower initial interest rate vs a Fixed Rate Mortgage. The interest rate can change at specified times, which is considered the "adjustment period". At these adjustment periods, the interest rate can change as well. When there are fluctuations in the current finance market, which is based on published indexes, like the LIBOR, US Treasury, and SOFR, the rate could adjust higher or lower, depending on the indexes. Having said this, an ARM also has "caps", which is a maximum and minimum amount the interest rate can change with each adjustment period. For example, you have a 5/1 ARM with a 5/2/5 Cap Structure. This means, for the first 5 years of your loan, the interest rate remains unchanged. Beginning the 6th year of your loan, your rate can increase up to "5" percentage points above the initial interest rate. Each year thereafter, your rate can adjust up to "2" percentage points, but it cannot exceed a total of "5" percentage points over the life of the loan.
ARM's are available for Conventional, FHA, and VA loans, offering different adjustment periods including 5/1, 7/1, etc. A 5/1 ARM means that the initial rate is fixed for 5 years, and will adjust every year after that for the life of the loan. A 7/1 ARM means the initial rate is fixed for 7 years, and will adjust every year after that for the life of the loan.
You might find an ARM helpful when purchasing, if you plan on moving or selling your home before the adjustment period begins. ARM's can also be helpful when interest rates are higher, providing a little relief on your monthly payments.
It is important to remember that once the adjustment period begins, your monthly payment can decrease, but it can also increase. Planning ahead and refinancing to a Fixed Rate Mortgage may be a good idea, if you see that your payment will increase significantly at the next adjustment period.
For more details on Adjustable Rate Mortgages, don't hesitate to contact me. We'll go over the best options available for you and your financial goals!