Adjustable Rate Mortgages (ARM)
Adjustable Rate Mortgages (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on an index (New Era Bank uses the United States Treasury Bill index). Payments may change over time based on changes to the index.
Features:
Often has a lower initial rate that may help borrowers qualify for a larger mortgage and therefore a larger house.
Benefits those:
-Who are planning to move or refinance in the first 5 years.
-Whose income has a high probability of increasing.
-Who need a low initial rate to qualify for their mortgage.
Usually there will be an initial period where the rate is fixed and then adjusts. For example New Era Bank offers:
- 1 Year ARM
- 3 Year ARM
- 5 Year ARM
1 Year Adjustable Rate Mortgage (ARM)
Features: With this mortgage, the interest rate can change annually. Annual rate increases are limited to 2% annually or 6% for the life of the loan. The initial rate is lower to reflect the risk that the borrower is assuming, so you may qualify for a larger mortgage amount. You will not have to refinance your mortgage if rates drop, and you could benefit from continued lower payments if rates do not rise.
Tip: Annual rate changes can make budgeting difficult, so calculate your monthly payment in the worst-case scenario, and if it fits your budget and is an acceptable level of risk, the ARM will save you money in the end.
3 Year Adjustable Rate Mortgage (ARM)
Features: The interest rate is fixed for 3 years, and then changes to a one-year adjustable rate in the fourth year. From there, the rate will adjust annually for the term of the loan. Annual rate increases are limited to 2%, and the lifetime increase is limited to 6%. Typically, the initial rate is higher than a one-year ARM, but lower than a fixed-rate.
Tip: Again, probably the best fit if you are planning to be in the home for less than five years. Calculate your monthly payment in the worst-case scenario, and if it fits your budget and is an acceptable level of risk, the ARM will save you money in the end.
5 Year Adjustable Rate Mortgage (ARM)
Features: The interest rate is fixed for the first 5 years and then switches to an adjustable rate in the sixth year. From there, the rate will adjust annually for the term of the loan. Annual rate increases are limited to 2%, and the lifetime increase is limited to 6%. The initial rate is usually lower than most 30 or 15 year fixed rate loans.
Tip: How long do you plan to stay in your home? If it is less than 5 years, this is most likely the loan for you. Calculate your monthly payment in the worst-case scenario, and if it fits your budget and is an acceptable level of risk, the ARM will save you money in the end.