On the surface, an ARM is simply what it sounds like: a mortgage with an interest rate that adjusts over time. How that happens is more complicated. The interest rate will fluctuate depending on the rate of a major index, such as the amount of money the Treasury Department receives from debt securities every week. ARMs operate a bit like the stock market. If the index remains low, you could always pay less than a fixed rate would be; if it shoots up, though, you could face paying much more.
Fixed Rate Period
ARMs begin with a fixed rate period, where the rate remains low for a certain amount of months or years. This length of time will vary, depending on each mortgage, but afterward the rates will adjust annually or in another period of time, outlined in your agreement. The 5/1 ARM is fairly standard, in which the fixed rate period will last for five years and adjust annually after that period has passed.
Unlike stocks, which could and occasionally do bottom-out, ARMs have limitations. These vary from the limit an interest rate can increase at one time to how much it can raise over the lifetime of the loan, or even how much the monthly payment can be.
Occasionally other ARMs exist, like the interest-only mortgage, in which the borrower may elect to only pay the interest month-over-month for a specified amount of time. Other ARMs are convertible and may be changed to a fixed rate mortgage for a fee.
If you’re planning to purchase, refinance, or want to learn more about our mortgage rates, simply fill out our Fast Response form or give First Option Mortgage a call at 888-644-1999. Our experienced mortgage professionals would love to sit down and discuss your needs. We look forward to hearing from you!