ARMs appeal to people who are planning on staying in a home for only a few years. For the first 1-3 years the interest rates are lower than the going rate. However, ARMs can be a risky and you may end up paying more interest than you would have with just your normal mortgage. The loan is variable the interest rate can go up and exceed the rate over time. There is a maximum that the interest on the loan can increase in each variance and it called the rate cap. For example, if you have an ARM that changes interest rates every 12 months the cap might state that the interest rate cannot rise more than 2% each year. All ARMs have a lifetime rate cap that will not let the interest rate go above a certain point. The ARM gets is determined by its index. Different indexes change at different rates. The indexes have advantages and drawbacks and are used in different situations. ARM indexes generally relate interest rates to how the economy in doing. As the interest rates fluctuate up and down so do your payments. Remember that ARMs don’t always adjust according to indexes. Different types of ARMs: 1. 1-Year ARM : An Adjustable Rate Mortgage in which the interest on your loan changes every 12 months from the anniversary mark of your 30 year loan. It is considered quite risky because your monthly payment will change each year and over time the interest rate will likely climb. 2. 3-Year ARM: An Adjustable Rate Mortgage in which the interest on your loan changes every 3 years during the 30-year period of the loan. It’s not as risky as the 1-year ARM because the interest rate doesn’t fluctuate as much. 3. 5-Year ARM: This Adjustable Rate Mortgage has an interest rate that changes every five years during the 30-year period of the loan. It is a safe median between a fixed rate mortgage and a 1-year ARM. 4. 3/1 Adjustable Rate Mortgage: There is a fixed interest rate for the first three years of the 30-year loan. After that it acts as a 1-year ARM with an interest rate that change every year. 5. 5/1 Adjustable Rate Mortgage: The 5/1 has a fixed interest rate for five years then acts as a 1-year ARM for the remainder of the 30 years. 6. 7/1 Adjustable Rate Mortgage: The ARM has a fixed interest rate for seven years. It will then act as a 1-year ARM and the interest rate will fluctuate every years. 7. 10/1 Adjustable Rate Mortgage: The ARM allows for a fixed interest rate for 10 years. It will then act as a 1-year mortgage and the interest rate will change every year.
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