ARM Mortgage Types Explained

If you are considering getting an ARM (adjustable-rate mortgage), there are many different options for you to look at. Each type of ARM has some advantages and disadvantages for you to consider. Here are a few of the different types of ARMs explained.

1-Year Adjustable-Rate Mortgage

One of the most basic forms of adjustable-rate mortgages is the 1-year adjustable-rate mortgage. This is a type of mortgage that is scheduled to last for 30 years. You have an initial interest rate when the loan is opened, and every twelve months, your interest rate is recalculated. The interest rate with this type of loan is tied to a financial index that can move up and down. This type of mortgage is preferred by those that need to get the lowest rate possible to be able to afford their mortgage payments. This is a very risky loan because your payment could potentially go up every year.

3-Year Adjustable-Rate Mortgage

The 3-year adjustable-rate mortgage is similar to the 1-year adjustable-rate mortgage but has one key difference. Instead of recalculating the interest rate every year, the lender recalculates the interest rate every three years. This means that you will have the same interest rate and monthly payment for three years at a time before it changes.

5-Year Adjustable-Rate Mortgage

The 5-year adjustable-rate mortgage is much the same as the 1- and 3-year adjustable-rate mortgages. The only difference is that you get five years at a time before the interest rate and payment are recalculated. This gives you even more stability than the 3-year adjustable rate mortgage. 

3/1 Adjustable-Rate Mortgage

The 3/1 ARM is actually considered a hybrid product. It carries some features of a fixed-rate mortgage and of an adjustable-rate mortgage. With the 3/1 ARM, you will be getting three years at the beginning of the mortgage with a fixed interest rate. After that, your interest rate is going to adjust every twelve months. This will allow you to take advantage of low interest at the beginning of the loan, but you will take on some interest rate risk after that.

5/1 Adjustable-Rate Mortgage

The 5/1 ARM is basically the same concept as a 3/1 ARM. Instead of getting three years of fixed interest, you are getting five years. After that, the interest rate can adjust every year.

7/1 Adjustable-Rate Mortgage

The 7/1 ARM is another hybrid product that provides you with seven years of a low fixed interest rate followed by a readjustment of the interest rate every subsequent year.

10/1 Adjustable-Rate Mortgage

The 10/1 adjustable-rate mortgage typically offers the longest fixed-interest-rate period of any of the hybrid mortgage products. This can provide you with some stability before the adjustable rate takes effect.

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