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The Details: Adjustable Rate Loan Program

If you’re a homebuyer who plans to move or sell in three to five years, an adjustable rate mortgage is often a wise mortgage choice since it can be less expensive over a short payback time period. ARMs—or adjustable rate mortgages—begin at a fixed rate (often much lower than the going 30-year rate) but then adjust after the initial fixed period of time.

Fast Facts about Ajustable Rate Mortgages

  • They change: Once the introductory rate expires, your interest rate and amount of your monthly payment will fluctuate according to index activity.
  • It pays to know your index: The 'index' used to determine your rate ultimately determines your monthly payment. Know which index drives your rate and review the index history for stability.
  • A pleasant surprise: With an ARM, if the index rate goes down, so does your interest rate.  This could mean a reduction in your total monthly payment, or a sudden opportunity to refinance at a fixed rate with a lower premium.

Ajustable Rate Mortgages, It’s all In the Numbers

If you’re a homebuyer exploring an ARM, expect to a see an ARM term defined by 1/1, 2/1, 3/1, 5/1, 7/1 and 10/1. The first number notes the amount of time the introductory rate is fixed.  The second number tells you how often the rate fluctuates, or adjusts.

For example, 1/1 means the introductory rate is stable for one year and adjusts every year thereafter for the life of the loan. A rate of 10/1 means the introductory rate remains the same for 10 years and adjusts annually every year for the remaining time of the loan.

With a 1/1 term on a 20-year mortgage, your payment could ostensibly change (or even worse—increase) every year for the life of the loan. On the same 20 year mortgage with a 10/1 ARM term, you can count on the same mortgage payment for 10 years, but you still may have a higher monthly payment for the remaining 10 years.

Contact a personal MortgageEase consultant to determine whether an adjustable rate mortgage or another financing option is the right solution for you and your homebuying budget. 

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