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How do Adjustable-Rate Mortgages Work?

Adjustable-Rate Mortgages (ARMs) are loans with interest rates that will change periodically based on an index. ARMs often offer some of the lowest possible mortgage rates, which can help borrowers save thousands within the initial fixed period.

ARMs are a good fit for a variety of home buyers, such as growing families, homeowners living in short-term housing situations, and certain borrowers who are planning to refinance after a few years. ARMs can benefit those who expect their property to increase in value, and buyers who intend to move out of their homes within a short period of time. In these cases, an adjustable rate mortgage can help reduce mortgage payments.

Interest rates for an adjustable rate mortgage vary at fixed intervals that are decided upon application, and borrowers can access ARMs through both private lending and Federally-insured offerings.

Benefits of Adjustable Rate Mortgages (ARMs)

ARMs offer flexibility that can benefit borrowers. The lower interest rates that are provided during the fixed period of the loan and the fact that rates could go down may help homeowners save, invest, or pay down other debts faster. Adjustable rate mortgages can also be refinanced for situations such as making structural improvements.

ARMs can also lower mortgage payments, which can make them an attractive choice for people who plan to relocate soon or want to reinvest in their homes.

Another benefit of ARM mortgages is that they typically require only a 3-5% down payment, making it easier for some homebuyers to qualify. This means that borrowers can purchase more house while refinancing up to 95% of the home’s value.

Hybrid Rates: 3/1, 5/1, 7/1, 10/1 ARM Loans

Hybrid ARM mortgages are back in the spotlight as one of the most popular mortgages for homeowners in the US. This is because they may feature lower initial interest rates than fixed-rate mortgages. Hybrid mortgages feature a fixed initial rate, after which the mortgage will change to an adjustable rate.

The most common type of hybrid ARM is the 5/1, but 3/1, 7/1, and 10/1 are also common hybrid mortgage scenarios. For hybrid ARMs, the first number indicates the initial fixed rate period, and the second refers to the number of times that rate can be adjusted annually.

ARM Interest Rate and Payment Caps

ARM loans enter an adjustable rate period after the fixed-rate period comes to an end. An interest rate cap places a limit on the maximum amount an interest rate can increase during the adjustable rate period and over the remaining lifetime of the loan.

For any questions about ARM mortgages, the application process, requirements, or the benefits of an adjustable rate mortgage vs. fixed-term loans, call us today at 800-228-9270!

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