Adjustable Rate Mortgages | Page 2

Fixed Period or Hybrid ARMs

These types of adjustable rate mortgages start with a fixed interest rate and then have an adjustable interest rate thereafter. The most common types of these loans are:

10/1 ARM 

A loan with a fixed interest rate and monthly payments for the first 10 years, and then an annual adjustable interest rate for the remaining 20 years. 

7/1 ARM

A loan with a fixed interest rate and monthly payments for the first 7 years, and then an annual adjustable interest rate for the remaining 23 years. 

5/1 ARM

A loan with a fixed interest rate and monthly payments for the first 5 years, and then an annual adjustable rate for the remaining 25 years. 

3/1 ARM

A loan with a fixed interest rate and monthly payments for the first 3 years, and then an annual adjustable interest rate for the remaining 27 years.

The longer the fixed period, of course, the more stability you are buying and therefore typically a higher interest rate. You can usually get yourself a fairly aggressive fixed rate on a 3- or a 5-Year fixed period ARM. As a matter of fact, these types of programs have been very beneficial to people who are not going to be in their loan for a long period of time.

So it’s important to ask yourself, “How long will you need to borrow the money for?” If we think rates are likely to be lower sometime in the next 3 to 5 years, or you are going to be moving in the next 3 to 5 years, these types of loans could be very effective in accomplishing the objective in the stability of a fixed rate but at a lower interest rate than a 30 year fixed. It doesn’t really matter if the loan converts to an adjustable, if you are not in it to see that occur.

Now, the last bit of advice is that you do not get into paying a lot of points on these types of loans. If you are going to get a 3 year fixed period ARM, then most likely you are doing that because you don't think you are going to be in that loan for a long period of time. The likelihood of you recuperating the cost of paying points is significantly diminished as a result of short fixed rate period of the loan.

Fixed period ARMs work best for people who:

• plan to be in the home for a short time
• expect to gradually increase their income and want a few years at a set payment level before potentially paying more
• intend to refinance before the adjustment period begins