The interest rates on these loans will be lower than fixed rate loans and are locked into a specific rate for a stated period of time and will then become adjustable for the remainder of the loan. For example, a 5-year fixed (30-year) loan would have a fixed interest rate for the first five years and then convert to an adjustable rate for the remaining 25 years. This adjustment is based on changes in a pre-selected index, and will take place according to a pre-defined schedule (generally every six months or every year). Your interest rate and monthly payment will fluctuate based on changes in your index. The most common indices are the Treasury Bill, Certificate of Deposit (CD), LIBOR and COFI.
Be sure to ask your loan officer about the yearly and lifetime cap of your ARM loan, as there will be a maximum amount the rate can go up per year, and there will be a maximum amount the rate can go up for the life of the loan.
Adjustable rate loans have more risk due to the possibility that the interest rate could increase. However, because you are assuming additional risk the lender will generally reward you with a lower interest rate and monthly payment during the initial fixed interest period. These loans are of particular benefit to borrowers that either plan to sell the property or refinance before reaching the adjustable period or believe interest rates will be unchanged or lower in the future.Types of ARM Loans:
- 3 Year Fixed (30 year)
- 5 Year Fixed (30 year)
- 7 Year Fixed (30 year)
- 10 Year Fixed (30 year)