What is an Adjustable Rate Mortgage?
An adjustable rate mortgage can save you thousands over a traditional fixed rate mortgage during the initial rate period. If you plan on moving or refinancing within the next 5, 7 or 10 years, this loan may help you save money by reducing the cost of your overall mortgage. Adjustable Rate Mortgages can be applied to any type of loan you take out, whether that be a VA, Conventional, FHA, or Jumbo Loan.
How It Works
Interest rates are fixed for a period of five or seven years. After your fixed rate period, interest rates can adjust up or down depending on market conditions.
Rate adjustments are capped at 5% above your initial rate and 2% or 5% per adjustment period. For example, if your initial interest rate is 3.75%, your rate will never be higher than 8.75% and will not increase more than 2% per year.
You can pay off your mortgage early without prepayment penalties.
If you are looking for the security of an FHA Loan, FHA and VA Adjustable Rate Mortgages (ARM) are available as well.
Because the interest rates rise and fall according to market standards, rates and payments can increase exponentially at any time. This can make it difficult to estimate your payments each year.
In some cases, a borrower can end up owing more than they originally at closing. This is due to payments being set too low, covering only part of the interest due.
Without having a fixed interest rate, borrowers can take advantage of low-interest rates as they fall instead of refinancing. Without the closing costs and fees, the borrower reaps the benefits as rates fall, along with their monthly payments. Often an ARM can provide a borrower with a cheaper option when buying a house if they only plan on living in it for a few years.