Adjustable Rate Home Mortgages
Statistics show that many people move to a new home or refinance their home every 5 years or so. When this is the case, why do you need the (generally) higher interest rates of a fixed rate mortgage? A key question to ask yourself when shopping for a home loan is: "How long do I plan on owning the property?" The answer will help you decide what kind of loan program best suits your needs.
Adjustable Rate Mortgages (ARMs) have become very popular in recent years, especially for people who are not planning on keeping their property long term. Adjustable rate mortgages are loans where the interest rate changes periodically, based on an index.
Intermediate ARMs
"Intermediate ARMs" (also called "Hybrid ARMs") are loans where the interest rate is fixed for 3, 5, 7, or 10 years, after which the interest rate adjusts based on the current index. Intermediate ARMs can offer you the best of both worlds - lower interest rates plus rates that are fixed for a pre-determined period of time. For example, a "5/1 ARM" is a loan that offers a fixed rate for five years, an adjustment at the beginning of year 6, and then changes annually thereafter (the "1"). You may also see intermediate ARMs where the second number is a "6" (for example, a 5/6 ARM, which means the rate can change every 6 months after the initial fixed period.)
Intermediate ARMs can be the perfect solution for people who plan on keeping their property for 10 years or less. The lower interest rates may allow you to qualify for a higher loan.
Most ARMs offer an interest-only option, for a lower monthly payment. And, if interest rates drop, when the loan becomes adjustable, it will adjust down.