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Adjustable Rate Mortgages

With an adjustable rate mortgage (ARM), the interest rate is fixed for a certain number of years, and then it goes up or down periodically based on a benchmark economic index. With every rate adjustment, the mortgage payment will change. The initial rate of an ARM is usually lower than the rate of a fixed rate mortgage.

The amount of time between rate adjustments is called the adjustment period. Many ARMs have a one-year adjustment period, meaning that the interest rate will adjust every year. Because rate adjustments can be unpredictable, most ARM programs offer a rate cap that limits the amount the interest rate can increase each year or over the term of the loan. The term for most ARMs is 30 years.

Advantages of an ARM:

  • After the initial fixed rate period, monthly payments could decrease if interest rates go down.
  • It may be a good choice for a homebuyer who plans to sell a new home after a few years.
  • It may be suitable for a homebuyer planning to refinance a new home within five to seven years.
  • It may be appropriate for a homebuyer who likes the initial payment stability but can afford later adjustments in interest.

Disadvantages of an ARM:

  • After the initial fixed rate period, monthly payments could increase if interest rates go up.
  • It may not be the optimal choice for homebuyers on fixed incomes.
  • It may not be the best choice for homebuyers who plan to keep their homes or properties for longer than the initial fixed rate period.

Types of Adjustable Rate Mortgages

An ARM is often written as a pair of numbers – for instance, “3/1 ARM”, “5/1 ARM”, “7/1 ARM” or “10/1 ARM.” The first number indicates the number of years the interest rate will remain fixed. The second number indicates the adjustment period of the loan, or how many years it will be before the interest rate adjusts. 

3/1 adjustable rate mortgage

5/1 adjustable rate mortgage

7/1 adjustable rate mortgage

10/1 adjustable rate mortgage

Adjustable-Rate Mortgage Disclosures

Type of Product Adjustable Rate Disclosures
3/1 Year P&I ARMs Download PDF
5/1 Year P&I ARMs Download PDF
7/1 Year P&I ARMs Download PDF
10/1 Year P&I ARMs Download PDF

To learn more, review the consumer handbook on adjustable rate mortgages.

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