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.
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.
With a 3/1 adjustable rate mortgage, you have three years at the initial fixed rate, then the rate adjusts every year for the remaining life of the loan. This could be a good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.
A 5/1 adjustable rate mortgage means the initial rate remains fixed for the first five years of repayment, then adjusts every year thereafter. Remember that your rate and monthly payments may go up after only five years, so this choice is best if you're expecting to sell or refinance the property within that period.
A 7/1 adjustable rate mortgage offers an initial rate that is fixed for the first seven years of repayment. After seven years, the rate adjusts every year thereafter for the remaining life of the loan.
With a 10/1 adjustable rate mortgage, the initial rate of the loan is fixed for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years, so you'll enjoy the stability of a 30-year mortgage at a lower price than a fixed-rate mortgage of the same term. But an ARM is likely not the best choice if you're planning on owning the same property for more than 10 years.
|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.